HEICO Corp (HEI.A) 2011 Q3 法說會逐字稿

Welcome to the HEICO Corporation third-quarter fiscal 2011 earnings conference call.

Certain statements in today's 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 cost to complete contracts; governmental and regulatory demands; export policies and restrictions; reductions in defense, space for homeland security spending by US and/or foreign customers, for competition for 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; and HEICO's ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest and income tax rates and economic conditions within and outside of the aviation, defense space, medical, telecommunication and electronic industries which could negatively impact our costs and revenues.

Parties listening to this 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.

The moderator for today's call is Laurans A. Mendelson, Chairman and Chief Executive Officer for HEICO Corporation. Please go ahead, sir.

Thank you and good morning to everyone on the call, and we thank you for joining us. We welcome you to the HEICO third-quarter fiscal 2011 earnings announcement teleconference.

I'm Larry Mendelson. I'm the CEO of HEICO Corporation, and I'm joined here this morning by Eric Mendelson, HEICO's co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's co-President and President of HEICO's Electronic Technologies Group; and Tom Irwin, HEICO's Executive Vice President and CFO.

Before summarizing and reviewing our third-quarter operating results in detail, I would like to take a few moments to really summarize the highlights of another record-setting quarter. Our consolidated third-quarter and year-to-date net sales, operating income and net income represent all-time record quarterly and nine-month results for HEICO, and that was driven principally by record sales and operating income within our Flight Support Group, as well as continued strong earnings in our Electronic Technologies Group.

Consolidated third-quarter 2011 net income and operating income are up 37% and 23% respectively on a 25% increase in net sales over the third quarter of 2010. Consolidated net income and operating income for the first nine months of 2011 are up 38% and 27% respectively on a 24% increase in net sales over the first nine months of 2010.

Flight Support set a quarterly net sales record in the third quarter of 2011 by improving 35% over the third quarter of 2010. The increase in net sales principally reflects strong organic growth of approximately 23%, as well as additional net sales contributed by the acquisition of Blue Aerospace in 2010, December 2010. Net income per diluted share in the third quarter of 2011 includes a $0.05 tax-related benefit from lower income tax expense attributable principally to lower state income taxes and higher R&D tax credits based upon returns filed during this quarter.

In July we paid our 66th consecutive semi-annual cash dividend at a rate of $0.06 per share, which represents a 25% increase over the prior split adjusted semi-annual per-share amount.

Our cash flow and balance sheet continued to remain very, very strong. Cash flow from operating activities was $85 million in the first nine months of 2011 compared to $67.9 million in the first nine months of fiscal 2010. As of July 31, 2011, we had no borrowings under our revolving credit facility and a cash position of over $27 million.

As a reminder, our existing credit facility with a group of banks is $300 million.

Drilling down into the detail, we will start with net sales, and our consolidated net sales for the third quarter of 2011 increased 25% to a record $197.3 million, up from $158.3 million in the third quarter of 2010. For the first nine months of 2011, consolidated sales increased 24% to a record $556 million, up from $447.7 million in the first nine months of 2010.

Flight Support reported record net sales of $140.7 million in the third quarter of 2011, and that was up 35% from $104.3 million in the third quarter of 2010. For the first nine months of 2011, net sales of Flight Support increased to a record $395.2 million, up 31% from $301.1 million in the first nine months of 2010. Flight Support's third quarter and first nine months of 2011 net sales increases are primarily attributable to strong organic growth of approximately 23% and 22% respectively, as well as additional net sales contributed by the acquisition of Blue Aerospace in the first quarter of 2011.

Flight Support net sales have now increased over each of the past six quarters, reflecting higher sales of new products and services, as well as improved demand for our aftermarket replacement parts and repair and overhaul services as a result of increased airline capacity and new product introductions.

Electronic Technologies reported strong net sales of $57.2 million in the third quarter of 2011, up from $54.1 million in the third quarter of 2010. ETG net sales increased for the third quarter of 2011 is entirely driven by organic growth of approximately 6%, resulting from continued strength in demand for certain of our aerospace, defense and medical products. Electronic Technologies' net sales increased to a record $162.5 million for the first nine months of 2011, which was up 10% from $147.2 million of the first nine months of 2010. This principally reflects organic growth again of about 6% and additional net sales contributed by a fiscal 2010 acquisition. The organic growth for the first nine months of 2011 principally reflects strength in demand for certain of our aerospace, defense, medical and electronic products.

Our net sales by market for the first nine months of 2011 were very similar to the first nine months of 2010 and were composed approximately 61% commercial aviation versus 63% in the first nine months of 2010, 23% from defense and space in 2011 compared to 22% in 2010, and 16% from other markets, including medical, telecommunication and electronics, and this compares to 15% in 2010.

Our consolidated operating income in the third quarter of 2011 increased 23% to a record $35.7 million, up from 29% in the third quarter of 2010 and increased 27% to a record $101 million for the first nine months of 2011, up from $79.5 million in the first nine months of 2010.

Flight Support reported record operating income of $24.6 million in the third quarter of 2011. That was up a large 40% from $17.6 million in the third quarter of 2010.

In addition, Flight Support reported record operating income of $68.4 million in the first nine months of 2011, and that was up a huge 36% from $50.3 million in the first nine months of 2010. The increases in operating income in the third quarter and first nine months of 2011 reflect higher sales volume, as well as improved operating margins.

Operating income at ETG increased to $15.4 million in the third quarter of 2011. That was up from $15.2 million in the third quarter of 2010. The operating income increase for the third quarter of 2011 reflects higher sales volumes. Operating income of ETG increased 11% to a record $44.6 million in the first nine months of 2011, up from $40 million in the first nine months of 2010, and that was principally due to higher sales volumes and improved operating margins.

Although corporate expenses increased to $4.2 million and $12 million for the third quarter and first nine months of 2011 respectively, as compared to $3.8 million and $10.8 million in the third quarter and the first nine months of 2010, they did decline as a percentage of net sales down to 2.1% for both the third quarter and the first nine months of 2011, and that was down from 2.4% for the third quarter and first nine months of 2010. This is due to controlled corporate spending relative to our net sales growth.

Operating margins at Flight Support increased to 17.4% for the third quarter of 2011, up from 16.8% in 2010 and improved to 17.3% for the first nine months of 2011, up from 16.7% in the first nine months of 2010. The improved operating margins in the third quarter and first nine months of 2011 principally reflects efficiency realized through higher sales volumes. Operating margins of ETG remained very strong at 26.9% for the third quarter of 2011 compared to 28.1% in the third quarter of 2010. The decrease in margins is primarily the result of product mix. Operating margins of ETG, however, improved to 27.4% for the first nine months of 2011, up from 27.1% for the first nine months of 2010, and that, again, reflects efficiencies gained through higher sales volumes.

As we have pointed out on previous calls, the revenues and profits of ETG can fluctuate from quarter to quarter based on the timing of customer orders or delivery requirements, as well as variations in product mix. Historically these quarterly fluctuations have leveled out over the full fiscal year.

Our consolidated operating margin was 18.1% in the third quarter of 2011 versus 18.3% in the third quarter of 2010 and 18.2% in the first nine months of 2011 versus 17.8% in the first nine months of 2010. Again, the variations in operating margins reflect the changes in the segment operating margins and corporate expenses.

Diluted earnings per share increased 37% to a record $0.48 in the third quarter of 2011, up from $0.35 in the third quarter of 2010, and they increased 38% to a record $1.28 in the first nine months of 2011, up from $0.93 in the first nine months of 2010. Net income per diluted share for the third quarter of 2011 includes a $0.05 tax-related benefit from lower income tax expense attributable principally to lower state income taxes and higher R&D tax credits based on tax returns that we filed during the quarter. Net income per diluted share for the first nine months of 2011 includes an aggregate total of $0.07 tax related benefit, including the $0.02 benefit from the retroactive extension of the R&D income tax credit, which we previously reported in the first quarter of 2011.

All fiscal 2010 and 2011 diluted earnings per share amounts have been retrospectively adjusted for our 5 for 4 stock split, which we distributed in April 2011. Depreciation and amortization expense of $4.5 million and $13.4 million in the third quarter and first nine months of 2011 respectively approximated the $4.7 million and $13.6 million reported in the third quarter and first nine months of 2010. Not much difference there.

R&D expense did increase 9% to $6.5 million in the third quarter of 2011, up from $6 million in the third quarter of 2010 and increased 11% to $18.2 million in the first nine months of 2011, up from $16.5 million in the first nine months of 2010. Significant ongoing new product development efforts are continuing at both Flight Support and Electronic Technologies as we reinvest approximately 3% to 4% of each sales dollar in R&D.

We believe that our commitment to invest in new product development has proven very effective over the years, and it continues to be a significant part of our long-term growth strategy.

SG&A expenses were $34.1 million in the third quarter of 2011. That compares to $28.6 million in the third quarter of 2010, and they were $99.1 million in the first nine months of 2011 compared to $81.8 million in the first nine months of 2010. The increase in SG&A expenses are mainly due to higher operating costs, principally personnel-related, associated with the previously discussed increase in net sales, as well as the acquired businesses.

SG&A expenses as a percentage of net sales decreased to 17.3% in the third quarter of 2011, down from 18% in the third quarter of 2010, and they decreased to 17.8% in the first nine months of 2011, down from 18.3% in the first nine months of 2010. Decrease in SG&A as a percentage of net sales in both periods is primarily due to the impact of higher sales volume on the fixed portion of SG&A expenses, as well as controlled corporate spending relative to our net sales growth.

Interest expense in the first nine months of 2010 and 2011 was negligible. I mentioned earlier that we had no borrowings under our $300 million revolving credit as of July 31.

Other income and expense were not significant. HEICO's effective tax rate decreased to 26.7 -- I'm sorry, to 26% and 29.7% for the third quarter and first nine months of 2011, respectively down from 32.3% and 34% in the third quarter and first nine months of 2010. The decreases in both periods primarily reflect an aggregate benefit that we recognized upon the filing of our 2010 US Federal, as well as state income tax returns, an amendment of certain prior-year state tax returns principally from state income apportionment updates, as well as higher R&D development tax credits, which increased net income by about $2 million or $0.05 per share net of expenses.

Additionally the decrease in the first nine months of 2011 as compared to the first nine months of 2010 reflects the $0.02 per share diluted share benefit in the first quarter of 2011 from the extension of the tax credit for qualified R&D activities, and the retroactive extension allowed us to recognize an estimated R&D tax credit for the last 10 months of fiscal 2010.

Net income attributable to noncontrolling interest totaled $6 million in the third quarter of 2011 compared to $4.6 million in the third quarter of 2010. They were $16.7 million in the first nine months of 2011 compared to $13.2 million in the first nine months of 2010. The increase in both periods is principally related to higher earnings of the Flight Support Group in which a 20% non-controlling interest is held by Lufthansa, as you all know, as well as a 20% non-controlling interest held in Blue Aerospace.

Moving on to the balance sheet and cash flow, as I mentioned earlier, our financial position and cash flow remain extremely strong. Cash flow from operating activities in the first nine months of 2011 totaled $85 million, including $33.9 million generated in the third quarter of 2011. This was up from $67.9 million in the first nine months of 2010, and it represented 157% of reported net income. Our working capital ratio -- of course, current assets divided by current liabilities -- remained very strong at 3.3% as of July 31, and this compared to 3.2% on October 31, 2010.

DSO of accounts receivable decreased to 47 days as of July 31, down from 50 as of October 31, 2010. And I have said before, our continuous monitoring of all receivables and strong collection efforts do go a long way to reduce our credit risks. Our inventory turnover rate July 31, 2011, was 112 days, down from 117 as of October 31, 2010, and this reflects our diligent watch over inventory levels maintained by our business unit leaders.

No one customer accounted for more than 10% of sales. Our top five customers represented approximately 17% of consolidated sales in net sales in the third quarter of 2011, and this compares to 18% for the third quarter of 2010. CapEx in the first nine months of 2011 were $5.7 million, which is a run-rate slightly below our current estimate of approximately $10 million to $12 million for the full fiscal 2011 year.

Moving on to our outlook, we think in our Flight Support Group markets the consensus market outlook for the commercial airline industry expects year-over-year capacity increases for the balance of calendar 2011, albeit at perhaps a slower rate than experienced in the first half of the year. This is in light of the current macroeconomic uncertainties.

In our Electronic Technology Group markets, we generally anticipate stable demand for our products.

Based upon current market conditions, we are increasing our estimates of full-year fiscal 2011 growth over fiscal 2010 in net income to approximately 29% growth over the prior year and in net sales to about 20%, up from our prior growth estimates of 20% in net income and 18% in net sales. We expect our consolidated operating margin for the full fiscal year of 2011 to approximate 18%. Cash flow provided by operating activities is expected to remain strong and to approximate $100 million in fiscal 2011, and that would represent about 140% of reported net income.

In addition to our focus on new product development and market penetration, strategic acquisitions complementing our existing operations are another important element of our long-term strategy. The aforementioned estimates exclude the impact of our previously announced pending acquisition of 3D Plus, which is subject to governmental approvals and normal closing conditions and any other potential acquisition opportunities which may develop. We do expect to complete the acquisition of 3D before our fiscal year-end October 31, 2011.

I do want to mention before I close that in my 20 plus years of being the CEO of HEICO Corp. I have never seen an environment where so many interesting, viable and reasonably priced acquisition opportunities have appeared before our eyes. Our plate -- and I'm expecting the question and I'm trying to preempt the question or response to your questions before you ask -- I think that there are many, many acquisition opportunities on our plate, and we are looking at a large number of acquisition opportunities, all well priced, and when I say well priced, reasonably priced within our acceptable purchase range. And you all know what that is, somewheres between 5 to 7 times EBIT.

These are all companies of good size. Some of them, I might point out, are larger than our previously made acquisitions. All of these acquisitions would be accretive within the first year of acquisition, we believe. All of them would be priced reasonably. All of them would generate strong cash flow. We think and we have been advised by sellers and investment bankers that one of the reasons that so many opportunities are coming our way at prices that we would normally pay is because we have no debt. Sellers are completely confident that we have the ability to close, to actually pay the money. We don't need any approvals by banks. None of our deals are subject to financing. They are all straight up deals, and sellers are very anxious to sell to us because of the credibility and their belief that the transactions will close.

I might add that we cannot make all of these acquisitions. They would be too many. There are so many that we are having a hard time doing our due diligence. We will do it carefully. We are not going to err and leave anything out of the diligence, but price will always be a consideration in multiples.

So I think we are in right now a relatively strong buyer's market situation, and we would hopefully take advantage of that.

I remind you that as the largest shareholders, you know, the Mendelson family and our directors and team members that own about 25% of the Company, every acquisition is with our -- we think of it as our money. So we will not make any frivolous and silly decisions.

So now, in closing, we do believe that our continued focus on developing new products and services, as well as increasing market penetration, while maintaining strong financial position and a very disciplined acquisition strategy, will provide opportunity for substantial growth and profitability.

That is the extent of my prepared comments, and I would like to now open the floor for any questions that may be out there. So I would ask the operator to please open the floor for questions.

(Operator Instructions). Tyler Hojo, Sidoti.

So first question, I mean obviously nice to see the really strong results within Flight Support Group, I guess 23% organic growth. I'm just wondering if you could maybe comment on if you saw any benefit from inventory restocking or the reversals of the deferred maintenance that impacted you on the way down?

I will give the mic to Eric who will respond to your question.

In anticipation of this question, I asked our sales executives over the last week specifically about the inventory restocking, and there is a consensus that there was not general restocking. In other words, airlines have not made decisions to increase the amount of parts they have on hand. They are trying to maintain their inventories at minimal levels. So I don't think that we have seen any significant benefit from restocking.

Of course, there has been greater utilization of aircraft. So, as a result, in order to get those aircraft ready, we have seen some demand for that. But I would -- from what folks are telling me, we have not seen any unusual level of demand due to restocking.

Okay. Well, that is helpful and encouraging, I guess.

And then maybe a follow-on to that, just in context with what's going on and some of the economic data that we have been seeing, I mean you have got this 20% long-term growth forecast that has been intact for as long as I have been looking at the Company. What are your expectations? Maybe you could talk about do you think 20% growth is attainable looking into your next fiscal year?

The answer is we target 20%, and obviously we can't do 20% forever and ever. But I have been asked this question for the past 15 years, and you say, when will you stop growing at 20%, that is our target. It continues to be our target. We do think that it is certainly in the foreseeable three years, five years, I don't know, but we just take one year at a time. I do think that 20% will remain our target, and I think that it is doable.

Great. Thanks a lot. I will let somebody else ask a question.

Incidentally we say that, but this year it is like 29%, and we got out ahead of ourselves. What was it last year, Tom?

(inaudible)

Last year it was just about close to 20% also. So okay.

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

Eric, just to delve into that question a little bit further on the organic growth, I mean looking at the capacity trends, you expected something quite a bit lower than what you guys put forth. So I was just curious if you had any pricing action in the quarter, or did you think it is market share gains or sort of maybe get a little in-depth on what you think is driving that growth?

Yes, I would say that it is I think primarily market share gains. As you are familiar, we tend to when the economy goes into recession and airlines seem to get serious about reducing costs, that is when our parts gets designed in, and we lay the groundwork for the future recovery. And I think that is what we are seeing now.

If we look back to 2009 and 2010, I think we picked up some market share there, and now that the demand is kicking in, we are seeing the revenues come off of that. Likewise, if there are economic issues and airlines get concerned, then that just further will help us gain marketshare going down the road.

Was the maintenance side of the business as strong as the parts side in Flight Support Group?

Yes. There was similar strength throughout the whole Flight Support Group, and this is pretty typical for us coming out of these economic -- coming out of a challenging economic environment.

Also to point out, of course, there were a lot of aircraft that were delivered roughly between the year 2008 and 2009, and those aircraft are requiring maintenance now. And I think we are seeing some of that kick in and help us as well.

And then we had a sort of little fleet renewal announcement here. A couple of them here especially domestically in the past couple of months. What sort of concerns do you have around the average age of the fleet coming down and what sort of impacts that could have? Do you think -- can you offset that with marketshare gains and new parts development and those kinds of things and pricing action?

Yes, we believe so. I mean if you look at this morning's or yesterday's Delta announcement, that is going -- they are probably the first aircraft they take out are going to be the older, the roughly 30 DC-9 aircraft, and our revenue is very, very small off of -- anything off of those aircraft.

So I don't think that there is going to be an impact. As a matter of fact, when the newer aircraft come out, their parts are significantly more expensive, significantly. And I think it is really a very good opportunity for us to be able to help the airlines with this.

You know, our business is one of continual older aircraft coming out, newer aircraft coming in, and this massive fleet aging. And manufacturers are very, very good at raising prices and ensuring that they have got incredible revenue streams coming off of that massively aging fleet that remains out there, and I think that those same trends are going to be very good for HEICO as well.

And then a quick one for Victor. Victor, I think I don't remember the exact breakdown in ETG on the different end markets, but I think defense is your biggest market there. What are you hearing from customers on the budget environment and pressures there, and is the strength in ETG, it sounds like that was pretty broad-based? It was medical and telecom as well, but maybe just address defense because I think that that is the one that most people are probably more concerned about.

Sure. I mean at this point nobody is really out there making predictions, too many predictions from our customers on their programs. It remains a strong year for us, and we will just see how things unfold.

I think we have got a pretty broad base of products on a lot of different programs. The thinking generally is that we will see the largest cuts on a smaller number of very large programs, which would be positive for us. Our foreign customers right now, that business is holding nicely as well. And I think generally when you look, by the way, at the group, not just at the defense side, I think our feelings about that mid-single-digits, low to mid-single digits organic growth profile remains intact.

Okay. Do you have exposure on JSF or anything like that?

Well, JSF we do have a little bit on JSF. To us, though, that really represents upside because it is essentially coming from zero. We don't have a lot of it in the RDT&E phase. So, if it is reduced, it is reduced from a number that we don't have now, meaning that it is still upside for us.

Also, just keep in mind that all predictions for 2012 budget into the next year is not -- we are not going to see reductions, I don't believe, in the defense budget immediately.

So I think in the next year we should be relatively protected. But we have niche areas, and we think that the military electronics in the areas that we are in are not going to see major kinds of cuts and reductions. As Victor pointed out, the F-35 will actually be an increase. No matter what it is, it will be a pickup.

So the overall potential is maybe smaller than it was a couple of years ago, but you are still starting from a zero base so you get growth out of it? Okay.

(multiple speakers) On that program, yes. Correct.

Thanks. Great quarter, guys.

Steve Levenson, Stifel Nicolaus.

Thanks for all the detail. Do you think next year -- obviously you have got some acquisitions in mind. Can you keep SG&A growth below the rate of sales growth?

I don't want to say below, but we are going to be shooting for that. It depends on the acquisition and the relationship in some of these acquisitions of SG&A to their -- to the sales of potential acquisition targets. But I think corporate -- existing HEICO SG&A, the answer is definitely yes. And I would think certainly we should not see a growth. Will it stay flat? You know, possibly. Will it drop? Possibly. But I don't see any exposure there at all.

Could you talk a little bit about the growth of the global fleet, particularly as it relates to Asia? A lot of new planes over there and what is going on for HEICO that could help you since a lot of them are CFM56-powered planes?

Eric will respond.

Yes, we are doing very well over in Asia. There is a lot of interest in our product. Again, in addition to the engines, we are all over the airplane, the air frame, the components and all sorts of other parts there.

So I think we got something to sell everybody. The Asian fleet is maturing, and normally what happens is an airline initially purchases aircraft. They don't need a lot of spare parts. They tend to have a good relationship with the original manufacturers, and then, as time goes on, they end up wanting an alternative, and that is where we come in. So I see a continued growth for us in Asia, as well as around the world for all of our products.

Got it. Thanks and I take it you are generally happy with all the re-engining orders as opposed to new small aircraft?

Yes, I think there is always going to be a place for us there. So we are fine with everything. We think that there are so many aircraft and so many engines out there that there is a lot of upside for us.

And just one housekeeping question for Tom. Do you have a projection on what the tax rate is going to be for 2012?

Yes, inherent in our estimates for the full year is a fourth-quarter tax rate of the more normalized obviously without the extra R&D and state benefits, which would put it around what it was last year about 34% of pretax income and effective tax rate of about 34% for the fourth quarter.

Okay. So you are not giving any information yet for next year?

No, not currently. We will introduce our expectations for 2012 in our next earnings call. We are in the process of doing our bottoms up detail budgeting with our business unit leaders, and we will be putting that together over the next weeks. And then we will take a look at it, and of course, that becomes the beginning of our outlook for next year.

Arnie Ursaner, CJS Securities.

I will not ask you about acquisitions, Larry. Cash flow seems to not be getting enough attention. You had extraordinarily good cash flow performance this quarter. Your guidance for Q4 implies $15 million of cash flow from operations. Last year you did $33.8 million, and I think we're how all asking the same question but perhaps in a different way. Was there something extraordinary or unusual in FSG in Q3 that caused your cash flow to jump in Q3, causes you to be more cautious in Q4? Did you borrow sales from Q4?

No, we did not borrow sales. I will Tom respond to it. No, we don't -- we did not borrow sales from Q4.

I think quarter by quarter we get some fluctuations, and in part, as an example, it has to do with tax payments, a big item, pension bonus contributions, the timing of those. And so in some cases, I think last year our liabilities fell in the fourth quarter, and so that would have had an impact.

But I think there is nothing unusual from a perspective of taking stuff in from the quarter and so forth. But I think predicting our full-year cash flow, we take a look at what we expect receivables and inventories to be at the end of the year based on sales and purchase schedules and so on and so forth, and then, of course, free cash flow, our CapEx budget and so forth. But nothing unusual.

Well, again, do you expect to have quite sizable cash payments in Q4 that would affect it, or is your inventory going to jump in Q4 reflecting --?

Yes, it would be primarily uses of cash, not -- well, the answer is no. Not working capital. We don't expect any big swings in receivables or asset inventory, but primarily related to cash requirements for payables.

I actually do have a question regarding acquisitions. We have had frequent times written about your use of proceeds and how it could impact the numbers if you were to make acquisitions. So remind me again, you have a $300 million bank line?

Yes.

Okay. If you use the entire bank line --

Incidentally and we have plenty of capacity beyond that. We have never -- our bank line has an accordion feature that we can implement that brings it to $500 million, and we can go to private placement. So we have -- the $300 million is just what we carry because we have never needed more. But if we do need more, we have access to it.

So would it be fair to say you would have no hesitation using the entire $300 million if you could find "the right targets?"

Yes.

Well, if the amortization is roughly 5% of your purchase price of something, if we value them at 6 times EBITDA, the earnings accretion, if you could do these, is close to $0.50 a share. I don't know if you would broadly care to comment on that type of math.

I can't question your arithmetic. The answer to where you are getting, we are looking at a number of acquisitions as I told you that would be very accretive. We never predict that we are going to pull the trigger and make them. Because we have found, if we look at 100 acquisitions, we make one. When we get to the serious stage, if we look at -- six to 10 maybe we will make one, two or three. It all depends and they are all different.

I believe when we have a large number, a plate full of potential good acquisitions at reasonable prices, the way we see them now where other people having trouble getting the money and we have it, I would think that the likelihood of us making a good acquisition, a sizable one or two, is probably high. But I don't want to tell investors, oh yeah, we are going to do it and definitely do it because so many things can go wrong between seeing a seller's projection and the pitch book and so forth and going in and kicking the tires and turning over the stones, and, you know, exactly what I'm saying.

I mean I have never seen a deal where they are predicting sales are going to drop. They are all going to go up like a hockey stick, except when we go in and we kicked the tires and we find out, well, where these assumptions come from and then we walk away.

So the answer is your numbers, I think, are reasonable depending if we buy between 5 and 7 times. Your amortization projection is reasonable. And I think all of these transactions would be nicely accretive, and we would like to make some of those transactions. And right now I think we are in the catbird's seat, and we are going to drive hard bargains.

Are the sellers private companies or private equity firms?

All of the above. I mean you have corporate divestitures, private equity, private sellers, everything out there.

Congratulations on the quarter. Thank you.

Thank you very much.

Eric Hugel, Stephens.

Good quarter. Continuing along the theme on the M&A, can you talk about where your head is? I mean are you just purely looking at the financials and the numbers, or do you have an inkling, would you rather invest in your commercial aviation business versus your defense given the questionability of the outlook for defense budgets?

The answer is we are very opportunistic. We look at the financial, and maybe more or as important or more important than the financial is the quality of the management that we will acquire as part of the transaction. That is assuming it is not a simple bolt-on acquisition.

The management really is a critical element. I have said this many times. We have very, very good results, and the main reason that we have good results and HEICO operates the way it does is because the, I think, extremely high quality of our presidents and business unit leaders. This is -- they never get the real credit for the results, but that is where it belongs. It does not belong with me. We pick these guys and so forth, and they go out and they do the job, and they are extraordinarily talented. They really, really are. I wish sometimes the investing public could meet some of these outstanding performers.

But -- so number one is management. The honesty, integrity, ability of the managements of potential acquisition candidates. Number two is the combined financial and business benefit to HEICO overall.

I can tell you in the military, everybody is screaming about military, military. There are military -- and we have some of them. We have military government operations that are fantastic, and they are doing extremely well and that we would not expect downturns really at all. Sometimes actually it will get better if they scramble the military budget.

So there are certain -- we operate in niche areas with niche products predominantly. A lot of it is military electronics, but a lot of these things we don't expect to be cut. Some of them are sold to foreign military and so forth when we have export license to do it.

I think that we look at everything, and we size up an opportunity to generate accretion and cash flow. And the only way you can do that is with outstanding operators at the companies that we acquire. We have turned down many companies because we did not have confidence in the management. Even though the company looked great and everything else, we did not like the management for one reason or another, and we run away from those deals.

I thought I would just add to that that generally we prefer healthy margin businesses, and healthy margins tell us a lot of things, one of which is that the company is very important to their customers. And so usually we are dealing with a niche product that for some reason it is a proprietary product or service that we have that we are acquiring in a business that they offer their customers, and the customers stay with them. So we like those kinds of businesses very much, and we look to buy those.

Again, adding to what Victor said and it is a very good point, you get high margins because generally you have some kind of market protection. If you are going to make pens and pencils and so forth, there's no commodity margins. We don't like commodity margins, so we search for companies with higher margins, and generally that indicates market protection, good management or a combination of both.

Moving on to a number topic, in terms of your commentary, you talked about aftermarket growth in the back half of the year beginning to slow. Is that what we should be thinking of in terms of FSG growth rates, or do you think with the new product introductions and the marketshare gains that you can buck the trend of the market?

Eric, do you want to --?

Yes, I think we have got a lot of great product out there. We have got a fleet which continues to age. I mean there are invariably going to be bumps in the road. There are times the airlines put out more in aircraft and pull some aircraft off. But we are very bullish on the overall direction of this.

We think the tide is -- the sea level is going to continue to increase. I mean the tide will go up and down accordingly, but overall I think we are going to do pretty well there.

Our guidance is a little bit more conservative for the back half of the year given the economic -- the worldwide economic situation today. We have not thus far seen any changes from our airline customers in terms of utilization or maintenance plans that would affect us. But we always want to keep that in mind and make sure we have got things properly balanced.

And I guess maybe lastly and I guess maybe Eric hit on it a little bit, your guidance, your 29% increase in net income would imply something like Q4 being a pretty sizable step down from where Q3 was. I think it would imply something like 38%, 39%.

I mean, look, I understand fully that you guys have very little incentive to go out there and make these huge guidance predictions and stuff like that. But I guess my question is, is there something one time-ish or business change -- and maybe Eric just sort of said it -- that we should be expecting in Q4 that we are not seeing?

You are correct in terms of obviously, if you look at the third quarter minus the nonrecurring tax items, it is about $0.43. If you interpolate our guidance for the full year, it accounts -- it represents around $71 million, so the fourth quarter would be roughly $0.40, which basically we looked at it as being somewhat ahead of the second quarter but not as strong as the third quarter. And it is for all the reasons that Eric mentioned in terms of caution later in the quarter, as well as looking at what we have in backlog scheduled for shipments within Electronic Technologies Group. And, of course, as Larry mentioned earlier and we have repeated many times, that is a more lumpy business model. So based on what we have in backlog -- and again, we do have more visibility in backlog in ETG typically for the six months worth of orders -- based on our current scheduled deliveries and the timing of it, that is the basis for our guidance. But, again, it is not to indicate that there is some dearth of business going into 2012 or anything like that. No, we continue to be optimistic that, and as Eric pointed out, we typically outgrow the market by virtue of our new product development and market penetration of our -- within our commercial aviation customers.

Chris Quilty, Raymond James.

Most of my questions have been answered, but one topic you did not touch on, oil prices and the recent pullback. Obviously the airlines are not going to make large long-term macro decisions based on near-term fluctuations. But any thoughts on how that might impact you here in the near-term either the fourth quarter or the next year?

You are right, Chris. Obviously oil is the biggest driver for the airlines, and the fact that it is down to $85 is very, very good for them. They are always concerned that it could spike, and as a result, we are constantly telling them they have got to make sure they have got competitive maintenance costs.

So I think that it is a good thing for them short-term. Obviously the lower it goes, the better it is for the airlines and probably the more flying that will occur. But I would say that that is really the benefit to the airlines of this economic concern that is out there. There may be some economic concerns; however, with airlines -- with oil prices down, that is offsetting a significant amount of it or maybe all of it for some of these guys. So I think that that is definitely helping us.

Great. And are there any other longer-term ramifications in terms of re-engining planes and your position on older engines relative to newer more efficient and how that impacts warranty cycles and things like that we should think about?

No, I mean, again, we are -- as you know, we are all over the airplane, not just the engine. And there is -- the aircraft that were basically delivered from roughly 1995 to roughly 2010 are getting a lot older. And the maintenance costs of those aircraft has gone way up.

So I think that may be while we are starting to see some -- while we are seeing some of the aircraft from the 1980s being retired, we have got these very expensive maintenance airplanes coming into the sweet spot here. So I think we are going to do very nicely.

Thank you and keep up the good work, guys.

Ken Herbert, Wedbush.

This is actually Andrew DuPuy on for Ken. I just had a question about FSG margins, 17.5%. It is still a percent down from your 2008 levels. I was wondering, is there any Blue Aerospace impact there? I was wondering how margins should look assuming volumes continue to ramp, if there is any more expansion room there or just any sort of offsets from Blue or any color on that?

This is Tom Irwin. Blue Aerospace really did not move the needle. It is a relatively small acquisition, a good company, but, again, within the broad context of the overall margins of FSG, it did not have an impact.

We have seen improvement in the Flight Support Group margins over the last 36 months. Our commentary long-term outlook is we expect to continue to target modest improvement, but, again, I think going into the year with the mix of repair services and other product lines that are not -- that are very profitable and good investments don't have the incremental margins that our PMA alternative products business does. With the weighting of all that and the growth, as Eric mentioned, of not only the PMA sales but also growth in the maintenance, etc., etc., those margins are going to -- we are going to continue to target modest improvement, but not dramatic changes upward in that.

Okay. Yes, that is helpful. And a question regarding the acquisitions just one more time. The valuation is 5 to 7 times -- I mean should it be implying that you guys are looking more into defense markets relative to commercial if the valuations are relatively cheaper, or should we not see it that way?

No, no, I don't think that at all. What I tried to convey is that there are a number of acquisitions. Some, relatively few are in the defense area. But there are some potential offerings out there that are defense that related that are probably pretty good and pretty good values and relatively protected markets.

Now we are not finished doing our due diligence and review. But no, absolutely -- we are looking in aerospace, we are looking in electronic technologies groups and areas like that. No, not to the exclusion -- I mean defense is not the only thing we are looking. I did want to mention that there are opportunities in defense, but that does not mean to say we are going to pull the trigger and just focus on defense. Absolutely not. We are doing what we have always done for the last 20 years. No.

Okay. Perfect. That is helpful. And then just one more question about the capital structure potentially. How much debt are you guys willing to take on? You guys as far as a debt to cap have really gone up 10% historically. I was just kind of curious there as far as the capital structure if you guys do pull off a pretty sizable deal in the future.

Well, I don't think that we have a number. I think it all depends on -- we are opportunistic buyers. And if we see a very outstanding opportunity, I would say that we would go for it. But we don't have a number to say we are going to do this, and we have to see the pricing of it, the quality of it and all those things.

I say we have -- we have never as you pointed out we have been 10%, 15% to equity. We have zero debt right now. We are not going to be -- we are not letting the $300 million burn a hole in our pocket. We are going to be very conservative on how we use it.

But I did want to indicate in Arnie Ursaner's question, he did a calculation. And so I wanted to try to indicate that we have great borrowing capacity, particularly at these rates. I mean -- money when you are sitting in our position, money is not even a factor today. The cost of money is not a factor making the acquisition. We pay these acquisitions back so quickly that the interest rates are not even a real consideration. The amortization that we have to report for accounting purposes is far more significant than the cash that we pay in interest.

So it is my belief, if we can make good cash flow, strong acquisitions and use the cash generated by the Company to reduce debt as opposed to having to allocate a huge amount of the debt service to interest, which is not really benefiting the Company directly, this is a great time to make acquisitions and to use our financial strength. In our strategic planning, we try to figure out why HEICO sells at the highest PE multiple of the aerospace companies. And part of it we think is because of the way we manage our assets and our strategic operations of the Company.

So this is a strategic planning concept. If we can get cheap money, pay it back quickly and keep the Company very sound and have more cash generated because we take advantage of a good situation, that is really the overall strategy.

Excellent. Solid quarter, guys. Thank you.

Jim Foung, Gabelli & Co.

Let me just touch back on acquisition one more time. Larry, do you have an idea how big you want to grow this Company in a few years? If you just grow it 20% a year, you can get to $1.3 billion in a couple of years. But it sounds like that could be a fast forward with the opportunities you see out there currently.

The answer is, Jim, that we don't put an upside target on it. I think that with the acquisitions that we are looking at now, it is very conceivable that we could hit $1 billion in the near future. But it is not the top line that I'm looking at; it is the bottom line. This year, if we generated $100 million in cash flow, that is really the critical thing.

So could we go to $1 billion, $1.3 billion? Yes, I think we could, but only if we have got commensurate cash flow and earnings accretion. So it is the bottom line that we always -- well, notice in our guidance we really focus on 20% bottom-line growth. And the top line is what it is, and that is how we run the Company. But yes, it is possible $1 billion, $1.3 billion. I don't think that is out of the realm of possibility.

Okay. And it sounds like this is one of the rare moments when you get opportunities like this so that you kind of -- just from your commentary, it sounds like it is something you really want to try to take advantage of if you can.

Absolutely. But, again, we are not going to do it in a frivolous manner. I mean we have got a very detailed, if you will, cumbersome almost due diligence process. We ask a million questions. We kick the tires, turn over the stones and so forth. We have made about 40 acquisitions. Virtually all of them have been successful, accretive, cash flowing and so forth. So we want to try to be very, very careful, and we are not going to make them in a frivolous manner. We are going to be very, very -- we are going to be just as diligent and careful.

I remind people that we are the largest single shareholder. And every time we make an acquisition, it is our money that is going on the line, more of it than anybody else. So all of the investors out there we consider to be our partners, and we are going to be very, very careful with our own money, as well as investors' money.

Right. No, that is terrific. That is part of the reason why I think the PE in your stock is so high is because you are very owner sensitive, and that lends to being shareholder sensitive and protecting the assets and growing the assets carefully.

Let me just ask a different question just in terms of the global slowdown. In the last downturn, you indicated that you had a lot of interest from new customers on PMA parts. And I just was not sure if you were able to close on some of those new businesses back in the last downturn. And this time around do you think you might get a step-up increase in terms of customers that are now looking at PMAs for the first time and wanting to do business with you?

I'm going to ask Eric to respond, Jim.

Yes, Jim, we have definitely seen every single time there is a downturn more people get interested in our product, and we have seen the benefit of that. Yes, we have added new customers. We continue to work with new airlines out there that have very young fleets and have not seen these big maintenance costs that are coming down the road, and I think that there is a lot of opportunity for us there as well.

Do you think you maybe can quantify that in terms of how much new customers you have got? And could we then be surprised in terms of your growth being higher than what you indicated as a slowing growth rate in the second half of this year or into 2012?

Well, I think our -- the new customers that we add that is all factored into the overall HEICO long-term growth rate. And yes, there are periods of fluctuation. There will be some seasonality, that kind of thing. But the new customers I would say are already embedded in our long-term projected growth rate. So I would not add that in addition to it.

But we have definitely seen adding airlines, adding customers. Of course, remember, once an airline takes delivery of an aircraft, they don't have much maintenance expense, and they don't realize what is about to happen to them as time goes on. And so, as those aircraft mature and as we get better acquainted with the airline people, then we will see the benefit for average sales.

Okay. Terrific. Great. I look forward to seeing you guys in a couple of weeks. Great quarter.

Jim, thanks very much.

And there are no further questions.

Okay. Well, as we wind up the third-quarter earnings call, I want to thank everyone for their interest in HEICO. We remain available to you by phone or e-mail. If you do have questions, call me, call Tom, Eric, Victor, and we look forward to speaking to you sometime in December when we will have the fourth-quarter and the year-end wrap-up.

So enjoy your Labor Day weekend, and again, we thank you very much and look forward to speaking to you soon. Thank you. That is the end of this call.

Thank you. This does conclude today's conference call. You may now disconnect.