HEICO Corp (HEI.A) 2011 Q4 法說會逐字稿

Welcome to the HEICO Corporation fiscal 2011 fourth quarter and full year results conference call.

Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties, and contingencies. HEICO's actual results may differ materially from those expressed in, or implied by, 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, space, or Homeland security spending by US 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 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 cost and revenues.

Those 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 of HEICO Corporation. Please go ahead, sir.

Thank you, Christy, and good morning to everyone on the call. Again, we thank you for joining us, and we welcome you to the HEICO fourth quarter and full 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; and Tom Irwin, HEICO's Executive Vice President and CFO. Just as a comment, Victor Mendelson, who normally takes part in this teleconference, is unable to be here. His wife had a slight medical procedure, nothing serious, but he won't be here this morning.

Before reviewing our operating results in detail, I would like to take a few moments to summarize the highlights of our record-setting fourth-quarter and full-year results. Our consolidated full fiscal 2011 and fourth quarter net sales and operating income represent all-time record fiscal year and quarterly results for HEICO. And this was driven principally by the record results in our Flight Support Group, and the continued strong results in the Electronic Technologies Group.

Consolidated full fiscal '11 net income and operating income increased 33% and 27%, respectively, on an increase of 24% in net sales over fiscal '10. Additionally, our consolidated operating margins improved to 18.1% in fiscal '11, up from 17.7% in fiscal '10. Consolidated fourth-quarter 2011 net income and operating income increased 18% and 26%, respectively, on an increase of 23% in net sales over the fourth quarter of 2010. Additionally, our consolidated operating margins improved to 17.9% in the fourth quarter of '11, up from 17.5% in the fourth quarter of '10.

Flight Support set a quarterly net sales record in the fourth quarter of '11, improving 30% over the fourth quarter of '10. And that increase in net sales principally reflects strong organic growth of 20%, as well as additional net sales contributed by the acquisition of Blue Aerospace during the first quarter of 2011. Electronic Technologies set a quarterly net sales record in the fourth quarter of '11, improving 12% over the fourth quarter of '10. The increase in net sales principally reflects strong organic growth of 9%, as well as additional net sales contributed by the 3D Plus acquisition in September 2011.

Our fourth quarter net income per diluted share increased 19% over the comparable period of fiscal '10. The fourth quarter of '11 includes a net $0.06 charge from impairment losses, partially offset by a reduction in the liability recorded for contingent consideration. Our cash flow and balance sheet remain extremely strong. Cash flow from operating activities was $126 million in fiscal '11, compared to $102 million in fiscal '10. As of October 31, the Company's net debt to equity ratio was 3.7%, with net debt, which is total debt less cash, of $22.7 million.

We completed our 43rd acquisition since 1990 with the acquisition of 3D Plus in September 2011. 3D is a leading designer and manufacturer of three-dimensional micro-electronic and stacked memory products used predominantly in satellites, and also utilized in medical equipment. We believe that 3D is a unique company, offering us the opportunity to expand our satellite products business both inside and outside of the United States.

We also completed the acquisition of Switchcraft in November 2011. Switchcraft is a leading designer and manufacturer of high performance, high reliability, and harsh environment electronic connectors and other interconnect products. Switchcraft broadens our interconnect offering by adding many products to our business which we did not offer, and by adding customers not previously served by HEICO. We expect both of these acquisitions to be accretive to our earnings per share within fiscal 2012.

Fiscal 2011 marks the sixth consecutive year that HEICO has been included in the list of Forbes 200 Best Small Companies. And the second consecutive year HEICO was named as one of the 100 Best Small Companies by Forbes. During fiscal '11, we distributed a 5-for-4 stock split in April. And increased our semi-annual cash dividend by 25%, effective with our July dividend. And earlier this week, we declared our 67th consecutive semi-annual cash dividend since 1979. I want to note that our Board may consider additional stock splits and/or increases in cash dividend in the future, as deemed appropriate. And at the present time, we don't have the authorized number of shares to permit a stock split or stock dividend. But I would think that the Board will consider requesting shareholders to increase authorized shares when the Board next meets in March of 2012.

Earlier this week, we also completed a new $670 million revolving credit facility, giving us excellent flexibility to continue to aggressively pursue quality acquisition opportunities. We are very grateful that HEICO's excellent performance and credit characteristics enabled us to more than double the size of our prior $300 million facility.

That's the extent of the overall 30,000-foot comments. Now, drilling down into the detail. Our net sales, consolidated, increased 23% in the fourth quarter of '11 to a record $208.9 million, up from $169.4 million in the fourth quarter of '10. Consolidated net sales increased 24% to a record $764.9 million in fiscal '11, up from $617 million in fiscal '10.

Flight Support reported record net sales of $144.4 million in the fourth quarter of '11, up 30% from the $111.2 million in the fourth quarter of '10. Flight Support's net sales for fiscal '11 increased to a record $539.6 million, up 31% from $412.3 million in fiscal '10. Flight Support's fourth quarter and fiscal '11 net sales increases principally reflect strong organic growth of approximately 20% and 21%, respectively. As well as additional net sales contributed by the acquisition of Blue Aerospace in the first quarter of fiscal '11. Net sales of our Flight Support Group have now increased over each of the past seven quarters, reflecting higher sales of new products and services, as well as improved demand for our after-market replacement parts, and repair and overhaul services. And this is a result of increased airline capacity, higher sales of, and demand for, our industrial products.

Electronic Technologies reported record net sales of $65.3 million in the fourth quarter of '11, up 12% from $58.4 million in the fourth quarter of '10. Net sales of ETG in fiscal '11 increased to a record $227.8 million, up 11% from $205.6 million in fiscal 2010. The fourth quarter and full year net sales increase in ETG represent strong organic growth of approximately 9% and 10%, respectively, as well as additional net sales contributed by a fiscal 2010 acquisition, as well as the aforementioned acquisition of 3D Plus. ETG's fourth quarter and fiscal '11 organic growth principally reflects strength in demand for certain of our defense, aerospace, medical, and electronic products.

Our net sales by market in fiscal '11 was composed approximately 60% from commercial aviation, versus 62% in 2010. 24% from defense and space, versus 23% in '10. And 16% from other markets including medical, telecommunications, electronics, and this compared to 15% in 2010.

Moving on to operating income, consolidated operating income in the fourth quarter of '11 increased 26% to a record $37.4 million, up from $29.7 million in the fourth quarter of '10. And increased 27% to a record $138.4 million for fiscal '11, up from $109.2 million in fiscal '10.

Operating income of Flight Support in the fourth quarter of '11 improved to a record $26.6 million, up 52% from the $17.6 million in the fourth quarter of '10. Flight Support's operating income in the full fiscal 2011 increased 40% to a record $95 million, up from $67.9 million in fiscal '10. The increases in operating income for the fourth quarter and fiscal '11 full year represent both higher sales volumes and improved operating margins.

ETG reported operating income of $14.9 million in the fourth quarter of '11, compared to $16.2 million in the fourth quarter of '10. And the results for the fourth quarter of '11 include the impairment losses related to the writedown of certain intangible assets to their estimated fair values, partially offset by a reduction in recorded value of contingent consideration related to a prior-year acquisition. This reduced operating income by $3.8 million in the aggregate. ETG's operating income in fiscal '11 increased 6% to a record $59.5 million, up from $56.1 million in fiscal '10. And the increase in operating income for fiscal '11 principally reflects the higher sales volumes.

Corporate expenses remained flat at $4.1 million for both the fourth quarter of '11 and '10. And increased to $16 million in fiscal '11, compared to $14.8 million in fiscal '10, but fell to 2.1% of net sales in fiscal '11, compared to 2.4% in the prior year. Our consolidated operating margin improved to 17.9% in the fourth quarter of '11, up from 17.5% in the fourth quarter of '10. And improved to 18.1% in full fiscal '11, up from 17.7% in fiscal '10.

Operating margins of Flight Support increased significantly to 18.4% in the fourth quarter of fiscal '11, up from 15.8% in the fourth quarter of '10. And increased to 17.6% for fiscal 2011, and that was up from 16.5% in fiscal '10. The improved operating margins in the fourth quarter and fiscal '11 principally reflect efficiencies realized through higher sales volumes.

Operating margins of ETG were 22.8% in the fourth quarter of '11, compared to 27.7% in the fourth quarter of '10. And were 26.1% in fiscal '11, compared to 27.3% in fiscal '10. The decreased operating margins for the fourth quarter and fiscal '11 principally reflect the aforementioned impairment losses that were partially offset by the reduction in recorded value of contingent consideration.

Diluted earnings per share increased 19% to $0.44 in the fourth quarter of '11, up from $0.37 in the fourth quarter of '10. And they increased 32% to a record $1.71 for fiscal '11, up from $1.30 in fiscal '10. All fiscal 2010 diluted earnings per share amounts have been adjusted retrospectively for our 5-for-4 stock split, which was distributed April 2011. Depreciation and amortization expense increased to $18.5 million for the full fiscal '11, up slightly from $17.6 million in fiscal '10, primarily reflecting higher amortization expense related to identified intangible assets acquired as part of previously discussed fiscal 2011 acquisitions.

R&D expense increased 14% to $7.1 million in the fourth quarter of '11, up from $6.2 million in the fourth quarter of '10. And they increased 12% to $25.4 million in the full fiscal '11, up from $22.7 million in fiscal '10. 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 into R&D and new products. We are budgeting approximately $27 million in R&D spending in fiscal 2012. And that would be an increase of about 5%. We believe that our unwavering commitment over the past 21 years to invest in new product development has proven very effective in allowing us to offer our customers lower cost and/or innovative products. And it continues to be a significant part of our long-term earnings growth strategy.

SG&A was $36.9 million in the fourth quarter of '11, compared to $31.4 million in the fourth quarter of '10. And that increase compared to the fourth quarter of '10 is principally due to the previously mentioned impairment losses. SG&A expenses were $136 million in the full fiscal '11 compared to $113.2 million in fiscal '10. And the increase in SG&A in '11 as compared to '10 is primarily attributable to higher operating costs associated with previously discussed growth in net sales as well as the acquired businesses. SG&A as a percentage of net sales decreased to 17.7% in the fourth quarter of '11, down from 18.5% in the fourth quarter of '10, and decreased to 17.8% in full fiscal '11, down from 18.3% in fiscal '10. And that decrease as a percentage of net sales in both periods is primarily due to the impact of higher sales volumes on the fixed portion of SG&A expenses, as well as controlled corporate spending relative to our net sales growth.

Interest expense in the fourth quarter and full fiscal '11 and '10 was not significant due to our low debt levels and low variable rate interest under our revolving credit facility. Outstanding debt balance was $36 million as of October 31, 2011. And the weighted average interest rate was less than 1%. Other income in the fourth quarter of both years was not significant.

HEICO's effective tax rate was 34.6% in the fourth quarter of '11, compared to 32.8% in the fourth quarter of '10, and was 31% in the full fiscal 2011 versus 33.7% in fiscal '10. During fiscal '11, we recognized a tax benefit principally from state income apportionment updates, and higher R&D development tax credits upon filing our 2010 federal and state tax returns, and amendments of certain prior year state tax returns in the third quarter. And we also benefited from an income tax credit upon the retroactive extension in the first quarter of the R&D tax credit. And that increased net income by approximately $2.8 million or $0.07 per diluted share. The effective tax rate of 34.6% in the fourth quarter of '11 is in line with our estimated effective rate for fiscal '12, which is 34% to 35%.

Net income attributable to controlling interest totaled $5.9 million in the fourth quarter of '11, compared to $4.2 million in the fourth quarter of '10. And totaled $22.6 million in fiscal '11, compared to $17.4 million in fiscal '10. 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.

Moving over to our balance sheet and cash flow, I note that our financial position and cash flow remain extremely strong. Cash flow from operating activities in fiscal '11 totaled $125.5 million, including $40.5 million generated in the fourth quarter of '11. And that was up from $101.7 million in fiscal '10, and represented 172% of reported net income. HEICO, as you all know, loves cash flow. Our working capital ratio continues strong at 2.6 as of October 31, and that compared to 3.2 in October 31, 2010.

DSO of accounts receivable decreased to 47 days as of October 31, down from 50 days as of October 31, 2010. As I've said before, we continue to work very hard to limit our credit risk. And we regularly monitor all of our receivables. And we do have strong collection efforts. No one customer accounted for more than 10% of net sales. Our top five customers represented approximately 17% of consolidated net sales in fiscal '11, compared to about 18% in fiscal '10.

As the public is aware, AMR, the parent company for American Airlines, filed for Chapter 11 protection in November 2011. To date, HEICO has not been significantly impacted. Although American Airlines is a prominent customer of ours, we previously indicated that no one customer accounts for more than 10% of our net sales. And it's been our experience with previous airline bankruptcies, such as Delta and United, that our businesses tended to expand with these companies as a result of the value offered by our products and services.

Inventory turnover as of October 31, '11 improved to 113 days. And that's down from 117 in October 2010. And that reflects efforts to prudently manage inventory. CapEx in fiscal '11 were $9.4 million. And depreciation was $10.7 million. The Company's net debt to equity ratio was 3.7% as of October 31, with net debt of $22.7 million.

As previously reported earlier this week, we have entered into a new $670 million unsecured revolving credit agreement with a strong bank syndicate. It matures in December 2016, five years. The new credit facility may be extended for two one-year periods. And may be increased to $800 million under certain circumstances. Our strong cash flow and balance sheet, combined with our availability to debt capital, has allowed us to take advantage of the acquisitions of 3D Plus and Switchcraft. And of course, will enable us to take advantage of other prospective acquisition opportunities as they might occur.

Now, for the outlook. Improved economic conditions and increased capacity within the airline industry resulted in significantly higher demand in fiscal '11 for our Flight Support group's products and services. Demand within defense, aerospace, medical and electronic markets of our Electronic Technologies group has also remained strong. As we look forward to fiscal 2012, the general overall economic uncertainty may moderate growth in the commercial aviation markets, while we expect overall stable markets for the products of ETG. Historically, we have experienced greater growth in the markets in which we operate, and we will continue to target such growth in fiscal 2012.

We are currently estimating growth in fiscal '12 full year net sales of approximately 15% to 18%, of which approximately 50% to 60% would be acquired. And net income of approximately 10% to 12% over 2011 levels, with consolidated operating income approximating $155 million. Depreciation and amortization approximating $30 million. These estimates include the recent acquisitions of 3D and Switchcraft, but exclude any additional acquisitions we might make.

Our fiscal 2012 earnings growth estimate of 10% to 12% approximates our fiscal 2011 guidance estimate as we began last year, 12 months ago. And, of course, I don't have to remind you, as the year progressed we moved that up as we got more visibility, and finally wound up the year, the bottom line was ahead about 31%. Cash flow provided by operating activities expected to remain strong, and to approximate $120 million to $130 million in fiscal '12. CapEx in '12 are budgeted presently to approximate $20 million to $22 million.

As you all know, in addition to new product development, strategic acquisitions that complement our existing operation are an important element of our long-term growth strategy. Consistent with this strategy and our long -term growth goals, we continue to target net income growth of 20% for the full fiscal 2012 year, but it is too early at this time for us to make such final predictions. With our new revolving credit facility, we are in a strong position to aggressively pursue our strategy to acquire high-quality companies with strong managements, offering both earnings accretion and growth opportunities, all at reasonable prices that we have paid in the range historically. Our pipeline remains full, and the market for acquisition opportunity is robust. I remain optimistic that we will have opportunities to further enhance our growth objective through additional acquisition.

In closing, I would like to thank our HEICO team members. It is through their dedication and efforts that we've achieved significant 21-year compound annual growth of 17% in net sales, and 19% compound growth in net income. And we believe our focus on developing new products and services, as well as increasing market penetration, while maintaining a very strong financial position and a very disciplined acquisition strategy, will provide opportunity for continued substantial growth and profitability. I also want to thank our investors who, many of them are on the line right now, for being so supportive and interested in HEICO. And we hope and we feel confident that we will continue to earn your trust and confidence.

And with that, I would like to open the floor for any questions.

(Operator Instructions) Tyler Hojo of Sidoti & Company.

I was actually wondering if you could talk a little bit about what kind of air traffic growth or capacity growth is baked into your preliminary fiscal '12 guidance.

I think I'll let Tom talk about that, please.

Yes, Tyler. At this point, from what we see in terms of overall market expectations, I think it's built into our estimates, our business unit estimates or traffic growth, somewhere in the mid to low single digits. Say 4% or 5%, something like that. So somewhat down for 2012 versus 2011 based on, again, not our own internal estimates but what we see and read and hear in terms of data in the marketplace estimates.

And just in regards to that organic growth, you said 50% to 60% of that growth range is acquired. Would you be able to talk a little bit about how that breaks between the two business segments, just the overall rate of growth?

Just generally speaking, as has been the historic case, the FSG group, we think, has inherently a higher organic growth profile than the Electronic Technology group. That's been consistent for a number of years. We've said mid single digits in ETG, and 10% to 12% in FSG. And, again, we don't give out segments. At this point we certainly wouldn't issue guidance of the overall organic growth. It would obviously be a weighted average of round numbers, 2/3 in Flight Support Group revenue and 1/3 in Electronic.

And then just one last one for me. The 20% organic growth that you saw in the Flight Support Group this quarter, just wondering, have you seen any benefits from restocking or deferred maintenance yet? Or is that still just steady state demand?

Tyler, this is Eric, good morning. With regard to restocking, no, we really don't believe that the airlines have been restocking. Clearly, I think the industry experienced some amount of pent-up demand in 2011. But I would not consider it as really restocking. In other words, putting more inventory on the shelf. There was a lot of deferred maintenance so they got caught up on some of that maintenance. But I would not say that they, if you will, restocked their shelves with more months of inventory on hand.

Julie Yates of Credit Suisse.

Tom, perhaps can you provide the breakdown of growth between services and parts in the Flight Support Group for the quarter?

In the fourth quarter, of course overall in Flight Support was over 20%. The parts business, obviously, as historically indicated, that growth of the service business quarter-over-quarter, fourth quarter of this year versus fourth quarter of last year, service was probably up maybe about 10%. And obviously then parts, the other roughly 2/3, would be over 20% to come up with the average of 21% roughly.

And then with the cautious commentary on the commercial aviation about the general economic uncertainty next year, are you starting to see any weakening trends in demand for Flight Support or is this more just conservatism?

I think, Julie, it's our natural conservatism. One of the problems we face, and I've said this on calls before and to anybody who will listen to me, our team is highly compensated and incentivized to do very well. When they start the year out they're ultra conservative and so forth. Which is fine. And during the year, historically we've been able to move up their estimates. They gain more confidence as we gain visibility. So going into the year, we assume things are not going to boom. And we have found in trying to guide expectations for investors that we're much better off starting low with a number that we feel very confident with, and moving that up. And that helps our credibility. So if we tell somebody something, they believe it. The problem has come that some people have started to get out ahead of us. But we really don't know.

Do I feel confident? That's why we have the comment in there we're going to aim at 20%. But do I know that we can deliver 20%? No, I don't know that. We're going to be pushing for that and we're going to be trying for that. But our people submit budgets. And as the year moves on, as we did this year, those budgets, we exceed the budgets and they do better. So I think we would rather be conservative and not get out too far ahead of our own people. But believe me, we're pushing these people. And we're pushing them in the sense that it's the carrot. They have big incentive to produce a strong result.

And then what is the projection on the tax rate for 2012?

For 2012, we're looking at, again, between 34% and 35%, maybe mid range. And 34% to 34.5%, something like that. And overall, as 2011 was, both the tax rate and the non-controlling interest, or what used to be called minority interest, ran about 48% of pre-tax. And in our modeling and in our estimates, overall we see about the same 48%. So with the tax rate going up a bit, we purchased, reduced the non-controlling interest in a couple of smaller entities, so that will come down a bit as a percentage of pre-tax income. And overall somewhere in about the 48% range for both taxes and non-controlling.

Unless, Julie, let me remind you if we get a republican administration we might be at 25%.

Arnie Ursaner of CJS Securities.

My first question relates to the charge you took. So two or three mechanical questions. Obviously if I just add back the $3.8 million you would have had a 580 basis point change in your margin there, and above the high end. I assume it's simple math and that's correct?

Yes, that's correct. At the operating income level, the net positive, or add back, if you will, would be the $5 million minus the $1.2 million. Both those are operating income charges or net of $3.8 million pre-tax.

Arnie, this is Larry. To clarify this special write-off and so forth, as I understand, as Tom has explained it to me, this would have been future amortization anyway. You have to go through the numbers and so again, we're conservative. And we said fine, we'll take it now. But that's gone, it's history, and it would have been written off in future periods.

Yes, roughly over the next five years.

It will be written off over the next five years, we took it in the current year, and that's fine.

That leads to two very obvious follow-ups. It wasn't one single acquisition or one disappointing acquisition that led to the charge?

The charge involved a couple of different product lines. But the big dollars, both in terms of the charge and the one item of contingent consideration, was one product line or one product acquisition of a couple years ago. And of course, the process is that we annually review all of our intangibles. You have to do a fair value analysis and future cash flow. It's rather complicated. And so, again, as Larry said, we look at the five-year forecast of revenue, et cetera. And in the end we probability adjusted it and net took a writedown of $3.8 million pre-tax.

Another obvious question. You normally don't provide specific D&A guidance. Yet you did this quarter. And it's a 50% jump year-over-year. So I'm a little surprised that you pre took the hit on various D&A. What is the cause of the sizeable jump in D&A expected next year?

The answer is, and we did it because it is going up, and most of it is going up -- of the $30 million that we reported as D&A forecast for next year, round numbers it's 50/50 -- 50% depreciation, 50% amortization. The big increase in amortization, of course, would be the two acquisitions. That is, we have two new businesses that really weren't in 2011 at all. 3D for a month and Switchcraft not at all. And so the impact of the expected amortization for those acquisitions. And then, of course, both those businesses have capital budgets that weren't in the prior years and therefore depreciation as well. So since it was going up by a fairly significant amount, and many companies report EBITDA, as well as non-GAAP, for us, operating income and D&A, if you add the two together they're pretty much equivalent to EBITDA. So we thought that would be helpful to investors in valuation models and so on and so forth that have some color, if you will, on both numbers.

One more very quick question. What's the rate on the facility you have? And if you start moving into the accordion, does the rate change?

The answer is the rate that we are paying now with the new facility is slightly more than the rate that we were paying on the old facility. And I'd like to expand on the reason for going from $300 million to $670 million. And I think management and the Board believe that we are in a unique situation with regard to interest rates. We think that projected, probably we're going to be around maybe 1.5% to 2%, maybe 1%. But it's a rate which is so de minimis compared to the benefits of acquisition that we would like to be very aggressive. Not in overpaying but aggressive in making acquisitions which have strong cash flow, have good businesses. And now is the time to do it because instead of paying interest into the markets or to the banks on a credit line, which might in normal times be 8%, we're going to be paying 1.5% maybe 2%. The difference of 6%, and let's assume we draw down -- and I'm just throwing a number out -- $400 million balance. That's between where we are, midway to $670 million. We would be, in normal times, 6% of $400 million is $24 million in interest, after tax about $15 million. That $15 million can go to debt service and reducing debt. And that's a lot of money.

So we expanded the facility, we have a lot of transactions and we're paying a very low interest rate. As a matter of fact, at 1.5%, you can almost ignore it in the calculation of accretion and everything else. It's so positive. So that's the reason for expanding the facility at this time. Also, the money markets are very strange, and I don't have to tell everybody. We believe, you have to take the money when it's available. We have a very good bank group. They offered us this facility. We're very happy to take it. They're happy. And it gives us availability and fire power. Who knows what's happening in the banks in Europe, and there's contraction in lending over there. And although we're US banks, but you never know what might happen. So running a public company, protecting the Company and the shareholders and our investment, we thought that this was a very good time, opportune moment, to take a commitment of $670 million, which can go to $800 million. And it was a very wise thing to do. So that's the philosophy behind what we did. And I've given you the interest rate.

Michael Ciarmoli of KeyBanc Capital Markets.

Tyler touched on your expectations for overall capacity growth next year. What are you seeing in terms of the cargo piece of that? I know we saw Lufthansa, say, last month, they were looking to cut their cargo capacity by between 20% and 30% next year. And then how much of a role did that play in your overall aerospace business?

This is Eric speaking now. That number that's our forecasted number is a combination of the cargo and the passenger airlines. For us, it's very difficult to break it down to know exactly where the parts and the services are going. But I would say it's cumulative, it's a total number.

And then looking at ETG, can you guys just give us some color on your thoughts on the defense piece of that business for next year, maybe where some of the bigger risks or opportunities are there?

Okay, Victor Mendelson is on the line. His line is open now, so he can respond to some of these questions as well. So Victor, if you'd like to go ahead.

I'm here. The answer is that we think that for 2012, we're not anticipating major changes on the defense side for us. Except we would expect it to be a little bit softer where we're doing ground-related products or ground-related systems or subsystems. But generally speaking, 2012, at this point, we think is probably, for the most part, except for those areas which I mentioned, relatively intact on the defense side. And then with the rest of the electronics business, our medical business has been very strong and the indications are for more of that in 2012. And our general electrical markets and electronic markets are strong going into '12, as well. So at this point, we're cautiously optimistic on the business.

And then lastly, margins in the quarter were pretty strong, especially if you back out that impairment. What are your thoughts on how that shapes up heading into next year? Are those sustainable? Are you guys expecting to be pretty lumpy throughout the quarters?

Yes, for ETG, I would expect that past this prelude, it should be relatively similar to the past. In my mind, of course I do strip out that charge because it really is, as far as I'm concerned, an accounting and non-cash charge. So at this point, I'm expecting it to be relatively similar.

This is Tom Irwin. What Victor was referring to, of course, was the amortization numbers both in the fourth quarter of last year and also the estimates going forward for next year that we referenced earlier, in terms of being increased for 2012 based on the acquisitions of Switchcraft and 3D. So if you do the math in terms of our estimates for OI, you'll see a little bit of decline in reported operating margins. Which, of course, is after the amortization of intangibles. And that is virtually all attributable to purchase accounting, the amortization on those transactions as well as in purchase accounting. You have transaction expenses now that get expensed. And also some one-time valuations of inventory and things like that, that get written up on a one-time basis that reduce profits. So the aggregate of that, which in 2012 will all be in the Electronics Group at this point since that's the only place there's been any significant acquisition activity in '11 versus '12. So those margins, as reported, at the operating income will have a little bit of reduction as a result of the purchase accounting.

Is it safe to assume most of that would occur in the first half of the year?

Yes, exactly. And one of the disadvantages, we've got it built into our estimates but since the acquisition of 3D was September and Switchcraft late November, we're actually still working on some of those numbers. The evaluations and the estimates of intangibles and the amortization lines and the opening balance sheet we've made some estimates for 3D but they could change slightly. And of course Switchcraft hasn't been reflected at all in our numbers. So at this point, we have estimates in there but they aren't rock solid estimates in terms of what the near-term impact is. But typically, it's based on, the inventory write up obviously reverses based on inventory turns which would typically be, say, six to nine months at the most, yes.

Ken Herbert of Wedbush.

I just wanted to clarify, Tom, you just said that Switchcraft was not reflected in your numbers. So if I understood from the release, is Switchcraft reflected in the 2012 guidance?

No. Switchcraft is included in our revenue and earnings guidance. Perhaps I misspoke. But what I mentioned was that some of the Switchcraft estimates for purchase accounting are in fact estimates at this point because we haven't completed the evaluation. But our estimates, both of revenue and earnings after purchase accounting, are included in our full-year estimates for 2012.

For the Switchcraft business, I know its got a little wider end market exposure than obviously defense and some of the traditional businesses. But what kind of growth do you think about that business and how should we think about that into 2012?

This is Victor. I can answer that for you. We believe that the growth in that business is comparable to the overall growth within the ETG. So like we typically say, the mid single digits, low to mid single-digit growth rate organically in that business. And if we do better, we'll be very happy but when we went into the acquisition we went in planning for low to mid single digits.

And Victor, if I could, just one question on Switchcraft. Can you just comment on synergy, or I know obviously you've got an existing significant existing connector exposure, but how should we think about that business as it relates to the other parts of ETG and some of the opportunity either for synergies or maybe a little more margin upside than we might have seen from other HEICO acquisitions?

Yes, I don't want to promise anything at this point. I think the potential is there. And in fact some of our other connector businesses have already started talking with Switchcraft and seeing where we might be able to get some synergies out of it. I suspect the possibilities are more on the sales side. But also some on the production. However, I think it's premature so we have not assumed any synergies going in. And if we achieve them then we'll be very happy but the assumption is to not have them.

Steve Levenson of Stifel Nicolaus.

On the SG&A, do you think you can get additional leverage going forward or will the acquisitions require some additional SG&A spending?

I don't think that we're talking about significant SG&A spending. We're not going to expand the corporate office. We have to hire a little bit. But I would say I think as we expand at this point, we would expect to gain benefit through SG&A being reduced as a percentage. So no, we don't expect any. We have a very flat organization and we don't expect to layer it with a lot of overhead.

The other thing is now on the credit line it's a substantially larger amount of money. I know the airframers, the OEMs are trying to shrink the supply chain. Do you see that same sort of effort in the MRO supply chain? And do you think there are not necessarily weak players but smaller companies that are going to have a tougher time surviving? Are those the sort of targets you're looking at right now?

I'll let Eric answer.

Yes, we're fine with that with supply base. We're doing all right. And I think there is capacity out there to take care of what we're doing. As a matter of fact, we've got some very good opportunities, in particular with our distribution group. Because there are a number of folks who we work with distributing their products and they can also supply competitive products for us, as well, for other platforms. So we don't obviously compete with the products that they provide but instead, we can really drive some synergies and additional capabilities. And we've had some good successes in that area. So no, I would not say that we're seeing constraints in the supply chain, if that's the question that you wanted an answer.

No, not so much constraints but that your customers are looking to reduce the number of vendors they deal with. Maybe it is the same question worded differently, but--

Oh, I see. You're saying that acquisition candidates. So as an opportunity to consolidate?

Exactly.

I'd just say that really on the PMA side we consolidated. We've done the majority of consolidation that's out there. Yes, there are some smaller folks who our customers probably may not be comfortable dealing with. I suppose there's some opportunity but I wouldn't overplay that one.

Ken Herbert.

I just wanted to check, just a clarification, with the revenue guidance when I look at the estimate you gave for organic versus acquisitions, does the guidance include about $75 million to $80 million from acquisitions in terms of fiscal 2012?

Maybe on the low end of that range, yes. Your math is right.

Rama Bondada of Royal Bank of Canada.

Going back to the writedown, you had mentioned it was in regard to this one product line. What was the end market for that product line? Was that a defense product or a medical product?

Primarily defense, and they were primarily customer relations valuations. Which, of course, when we bought the company. And, again, the two were related. We had an earnout provision so in valuing the intangibles, we considered that they would have an earnout amount. Based on the current estimates they will not make the earnouts so we reversed that. Similarly, we looked at an update of our revenue forecast I think over the next five to eight years. And again, the valuation in process is a residual cash flow present value and so we compared it to the carrying value.

So it wasn't like the program that this part was for was either cut or downsized?

No, it wasn't anything specific. It was overall valuation. It wasn't so much that they lost a significant customer or significant program. But rather, the forecasts that were used to set up the contingent earnout and that were used to record the opening balance sheet, based on independent appraisals, was updated. As we do for all of our businesses. And the result was the net writedown.

And then turning to the Electronics Group, I think earlier, Larry, you had mentioned that the growth that you're expecting in that group would be similar to what we saw in FY11 speaking organically. And then later on, I think there was talk of mid single digits. So I think last year, Electronics did 10% organic growth. So should we be expecting 10% organic growth or is it more mid single digit for FY12?

Yes, I think the answer is, the clarification we were talking about in the foreseeable future, the number that Victor referenced, mid single digits or slightly lower, say 3% to 5% is what is in our estimates at this point.

And then one other question, I think maybe I missed it. Looking at your FY12 guidance, you had mentioned CapEx expected to be between $20 million and $22 million. That's about twice the level you have for this year and the last couple years. Is there anything going on there that we should be aware of?

This is Tom Irwin again. The answer is a couple things. Number one, this is our budget. Historically we don't spend our full budget. Even looking at into last year, our estimates were, say, in the $10 million to $12 million, we wound up spending under $10 million. Now, that being said, in the $20 million to $22 million, there is a couple things. Number one, we have 3D Plus and Switchcraft. So we have new capital budgets for that. We do have some facility expansion which, again, usually when our CapEx budget goes up, it's the nature of a newer facility as opposed to just basic replacement equipment. So there is a component in the $20 million to $22 million for expansion of footprint, if you will. That being said, it would not shock us, I think, if we don't spend the full $20 million to $22 million. That process is an approval process at the beginning of the year. Each capital project must be presented and justified based on a return analysis and ROI and payback period analysis. And often things get pushed out or permanently deleted. But in the $20 million to $22 million is two acquisitions and some facility expansion. And then normal $10 million to $13 million of equipment, if you will.

And is that facility expansion in FSG or is that on the Electronics side?

It's actually both.

J.B. Groh of D.A. Davidson.

Most of my questions have been crossed off. But just to play on that last question, Tom and Larry, to characterize your CapEx budget, those are things that have been asked for but you haven't said yes to, right? Is that a good way to think of it?

We have a wish list. And, as Tom pointed out, we rarely, as a matter of fact I don't recall that we've ever spent the CapEx budget. But at the beginning of the year, as Tom points out, we want them to put in all -- we don't like surprises, so we tell them to put in their wish list and the kitchen sink. And before any of those expenditures are approved during the year, they go through a very detailed vetting process, as Tom pointed out -- return on investment, all these other things. So these are not just rubber stamped. But this is the potential that our operating people tell us that is the max potential that they will need during the year, if they did everything that they think they might do. I would be shocked if it gets to that number.

And then maybe Victor could help us out with business mix currently in ETG and then post Switchcraft between, I think, the three major buckets there would be defense, medical and general industrial. How does that change?

The general industrial and medical as a percentage would increase. Mostly, though, the general electronic markets would increase the most. Defense as a percentage would come down as a result of it, probably considerably just because they're so much into general markets. And then, of course, there's some aviation in there and maybe the aviation portion of ETG sales would be flat or up a little bit.

But what is defense now? It's a pretty significant portion of the total for ETG, correct?

Historically, it's been in the neighborhood of 40% 50%.

And then medical has been what? -- 15% or something like that?

Somewhere in that range.

And so you said defense probably -- does it get as much as cut in half?

No, not in half. But it gets cut considerably, definitely. I think it would be below the 40% range.

Eric Hugel of Stephens.

Larry, last quarter, you made a comment with regards to your acquisition pipeline. I think your comment was that it was the most robust pipeline that you'd ever seen. Can you update us? Are you still as enthusiastic about the pipeline today as you were last quarter? You pulled the trigger on Switchcraft and all that stuff but can you give us an update there?

I think that the pipeline is still robust. I think that we're seeing a lot of transactions. As you know, some of these things we look at and they don't look as good. You start to turn over the stones. I'm thinking of one particular thing that looked interesting and you start to look at it and it still is interesting but not at the price and the initial. And you've seen so many of these offerings where they tell you, they promise the kitchen sink, and when you start to go in and you look at it, you see it's really not there. But I can say there are still many opportunities. And we are really busy doing these due diligence reviews and so forth. So I'm still optimistic that we will. The fact that we took down $670 million is some indication that we have confidence that there are deals out there that we're going to be able to make. So I think it's still a good pipeline. I can't tell you if it's exactly the same or more or less, but it's still a strong pipeline out there. So I think there's a lot of opportunity.

And can you talk about where you are in terms of, on the PMA parts, new part introductions, how many new parts or new DER authorizations are you expecting for this year? And maybe can you talk about where you are now so we can think about it in terms of growth?

Sure, Eric. This is Eric speaking. Our number of PMA and DER approvals have been approximately consistent with prior year levels. We continue to be very aggressive in the development of new parts and DER approvals. So I would say consistent with our past numbers.

Chris Quilty of Raymond James.

I don't think this specific question has been asked, though you've heard a lot this morning. Which is, when you talk about your existing guidance of 10% to 12% earnings growth, net income growth, and you want to target 20%, is there a single major item in there that you look at as a driver? Or is it a combination of a bunch of things that would get you to that level?

I think it's a bunch of things. It's nothing out of the ordinary that we do. I think it's just all of the things put together. Intentionally as a strategy, I think, Chris, you know that we have intentionally broadened our product base, our customer base, and diversified the Company so that -- I've used this term many times -- HEICO grows glacially. So there is not one super star thing that's going to do it. It's going to be a combination of a number of things, and that's really the way we like it.

And if you caught a head wind in terms of air traffic that shaved 1 or 2 points off the expectations, can you still get there?

Yes, I think so. People have asked me what keeps you up at night. If we have a major international downturn, recession, depression kind of thing where air traffic is cut significantly, we're going to see our business cut. If we see a sharp reduction in the defense budget, it's going to impact us a little bit. It's not going to be critical for us. We have defense exposure but it's not that much. But yes, that part of our business will be hit. I think the most important thing is overall economic activity and if overall economic activity is reasonable, we're going to get to the numbers that we estimate. Hopefully we'll even do better. If economic activity strengthens in an election year and so forth, then business will strengthen and we'll see a little bit of that. But I don't think there is anything, one way or the other, except a major economic downturn, that would have a major impact on what we see at HEICO. And did you quantify what your exposure was out of Europe and specifically whether you've seen any tangible weakness? I'll let Eric answer that, but I don't think so.

There's natural fluctuation in the business month to month. And I don't think that we've seen anything outside of our natural fluctuation to date. So no, we're not anticipating anything out of the ordinary.

Jim Foung of Gabelli & Company.

I actually have all my questions answered but let me just ask one. And I don't know if you want to answer this or however you want to do it. Would you ever consider an acquisition that would be dilutive to earnings, Larry?

As a general comment, the answer is no. I don't want to preclude anything because if it was such a fantastic acquisition, in the long term, if it would be accretive, both earnings and cash flow, and would be very strong but would be a short-term dilution, would we consider it? We probably would consider it but it would have to be so spectacular going forward. As a general comment, we prefer accretive acquisitions.

Let me say one other thing. I don't think we're so smart that we can make an acquisition and be so much smarter than the guy that had the company before we did. We know how to operate and we know how to run companies, and we hire good managements. But I don't want to tell anybody that we're the smartest people in the world. Generally, what you see is what you get. Generally, and it's been our experience, that whatever a company is like before we acquire them when we do our due diligence, that's pretty much how the company is going to be after we acquire them. So to expect wonders, we really don't believe that. And so to go into something saying it's not going to really be good this year or next year. Your visibility drops tremendously the further out you go. So to make an assumption that, yes, after three years it's going to be wonderful, that's a leap of faith that we're highly unlikely to make.

Dr. Herbert Wertheim of Brain Power.

My goodness, there's an awful lot more analysts on the phone now than there was 20-something years ago.

And you know that very well, Herb.

We own about 4 million shares of your Company and have been your greatest admirers over the last 20-something years, and we thank you from our family and from the other shareholders. When I saw that you were purchasing Switchcraft, it brought back memories. When I was a young engineer almost 50 years ago at NASA, we were one of the largest purchasers of Switchcraft products. And you are really getting one of the finest companies there is in that particular product line. I have a question for you in that area. What percentage of their product is for the industrial business versus that for aviation and medical business?

Victor, can you answer that?

Yes. Their medical, aviation aerospace-related business is below roughly 20% of their business. And the balance is pretty well divided between audio, broadcast and general electronic markets.

This is certainly one of your largest acquisitions as far as number of people, and getting into a different product line. Do you see yourself moving more into an industrial type product line versus those of the military and aviation field?

I don't think, Herb, I don't think that's necessarily so. We're opportunistic in the acquisitions, which you know. We look to acquire well-managed, profitable, strong cash flow companies and Switchcraft came up on the radar screen. And it's because of that. So if we had a product line that was outside of aviation and medical, that had the attributes in terms of margin, cash flow and so forth, we would be very interested acquiring that. Because it's just like, we look at it as we are investing HEICO's money to get a strong cash flow earnings return. And if we can get that in the widget business we'll do it. Interestingly enough, most companies that have those characteristics are in the fields that we are operating -- electronic technologies, aerospace, and in some cases, niche areas of defense. We don't see that opportunity in too many other areas. But I wouldn't say that that's a strategy that we're pursuing as a business strategy, no.

[Doug Rabinovitch] of [Showhaber Rabinovitch]

You are aware of the current record gap between HEICO common shares and HEICO Class A common shares. Could you please explain the reasons for that abnormal gap?

The answer that we have been told is that the Class A shares do not have the same liquidity as the HEI shares. And when people buy shares, they are particularly interested in the liquidity. And therefore they are more likely to buy, and if you look at the volume on about a 3-to-1 basis, they buy the HEI shares as compared to the HEIA shares. Now, the reason that they don't trade, in our opinion, as much, the HEIA shares is because over the years, institutional buyers and large holders have purchased HEIA shares, some at discount to the HEI shares, and have put those shares away. And they're not for sale. And I've had people call me, I've had brokers call me and ask me that they would like to buy HEIA shares but they can't find them. So the problem, it is our understanding, as explained to us by a number of investment banking firms that have done studies for us, is that the issue is 100% the liquidity issue that makes people buy HEI as opposed to HEIA. And that they buy it probably, the difference is probably three times as many HEI shares trade as HEIA. And as you know, there are more HEIA shares outstanding but those shares are put away. To our knowledge, that is the explanation.

There are no further questions.

Okay. With that, again, I thank you all for your interest in HEICO. And if you have any other questions, we're all available, give us a call. And we wish you a very good holiday season. And we look forward to speaking with you on our first quarter 2012 earnings call which will take place sometime in February 2012. Thank you all. And that ends our conference call for this morning.

Thank you. This does conclude today's conference call. You may now disconnect. Have a good day.