HEICO Corp (HEI.A) 2013 Q4 法說會逐字稿

Good morning. My name is Crystal, and I will be your conference operator today. At this time, I would like to welcome everyone to the HEICO Corporation fiscal 2013 fourth-quarter and full year earnings results conference call.

(Operator Instructions)

Your host today is Laurans A. Mendelson, Chairman and Chief Executive Officer of HEICO Corporation. Before the conference call begins, I will read the following statement.

Certain statements in this conference call will constitute forward-looking statements, which are subject to 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, base 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 created 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 revenue. 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 the filings on forms 10K, 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. I would now like to turn the call over to Mr. Mendelson. You may begin your conference.

Thank you, and good morning to everyone on this call. We thank you for joining us, and we welcome you to the HEICO fourth-quarter and full fiscal 2013 earnings announcement teleconference. I'm Larry Mendelson. I'm the Chairman and CEO of HEICO Corporation, and this morning I'm joined here with 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; Tom Irwin, HEICO's Senior Executive Vice President; and Carlos Macau, our Executive Vice President and CFO.

Before reviewing the operating details, I would like to take a few moments to summarize highlights of another record-setting fourth quarter and full-year results. Full fiscal 2013 net sales passed $1 billion for the first time in HEICO's history. This achievement is a testament to the focus and dedication of every team member in our Company, and I would like to personally thank them at this time for this wonderful accomplishment. In July 2013, we paid our 70th consecutive semiannual cash dividend since 1979, and this was paid at a rate of $0.056 per share, which represented a 17% increase over the prior semiannual per share amount.

As reported yesterday, we declared an increased regular semiannual cash dividend of $0.06 per share, as well as a special and extraordinary cash dividend of $0.35 per share. The aggregate $0.41 per share cash dividend will be paid on January 17. The regular semiannual cash dividend represents a 7% increase over the prior semiannual per share amount of $0.056, and of course this has been adjusted for our 5-for-4 stock split in October 2013. The dividend payable in January would be the 71st consecutive semiannual dividend since 1979.

In October 2013, our ETG Group completed the acquisition of Lucix Corporation. Lucix is a leading designer and manufacturer of high performance, high reliability, microwave modules, units, and integrated subsystems for commercial and military satellites. The acquisition is consistent with our acquisition strategy of acquiring successful, well-managed, technical businesses and will serve to expand our already successful satellite and space component operations. We do expect Lucix to be accretive to our earnings within the first year following acquisition.

In November 2013 we entered an amendment to extend the maturity date of our revolving credit agreement by one year to December 2018, and to increase the aggregate principal amount to $800 million. Additionally, the amendment includes a feature that will allow us to further increase the aggregate principal amount by $200 million to become a $1 billion facility through increased commitments from existing lenders or the addition of new lenders. This amendment further offers us the financial flexibility to pursue our disciplined strategy of acquiring high quality businesses at fair prices.

Now I'll move on to the details of the operating results. Consolidated fourth quarter 2013 net sales of $287.4 million and operating income of $55.6 million, net income of $29.8 million represent record results, and this is principally driven by record net sales and operating income within Flight Support and ETG. Consolidated 2013 fiscal net sales of $1.1 billion, operating income of $183.6 million, and net income of $102.4 million also represent record fiscal year results for HEICO, and again driven principally by record net sales and operating income within both of our operating segments. Consolidated fourth quarter 2013 net income and operating income are up 25% and 22% respectively on a 19% increase in net sales in the fourth quarter of 2013. In addition, our consolidated operating margin improved to 19.3% in the fourth quarter of 2013, and this is up from 18.8% in the fourth quarter of 2012. Consolidated net income and operating income in fiscal 2013 are up 20% and 12% respectively on a 12% increase in net sales over fiscal 2012. Our consolidated operating margin remained consistently strong at 18.2% in both years.

The Flight Support Group set quarterly net sales and operating income records in the fourth quarter of 2013, improving by 27% and 37% respectively over the fourth quarter of 2012. The increases principally reflect strong organic growth of approximately 14%, as well as additional net sales contributed by a fiscal 2013 acquisition. Our ETG Group set quarterly net sales and operating income records in the fourth quarter of 2013 by improving 6% and 3% respectively over the fourth quarter of 2012. The increases principally reflect additional net sales contributed by a fiscal 2013 acquisition, as well as organic growth of about 2%.

Consolidated net income per diluted share increased 22% to $0.44 in the fourth quarter of 2013, up from $0.36 in the fourth quarter of 2012. This was a result of continued strong performances from both operating segments. Cash flow from operating activities was $131.8 million in fiscal 2013 and represented 129% of net income. As of October 31, 2013, the Company's net debt-to-shareholders-equity ratio was 50.1%, with net debt, which we define as total debt less cash, of $362 million.

Now, I would like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, to discuss the results of the Flight Support Group.

Thank you. The Flight Support Group's net sales increased 27% to a record $189.6 million, and increased 17% to a record $665.1 million in the fourth quarter and fiscal year 2013 respectively, up from $149.7 million and $570.3 million in the fourth quarter and fiscal year 2012 respectively. The increase in the fourth quarter and fiscal year 2013 reflects organic growth of approximately 14% and 9% respectively, as well as additional net sales of $18.7 million and $42.3 million respectively from fiscal 2013 and fiscal 2012 acquisitions. The organic growth in the fourth quarter and fiscal 2013 principally reflects an increase in net sales from new product offerings and improving market conditions within our after-market replacement parts and repair and overhaul services product lines, and within our specialty product lines. The Flight Support Group's operating income increased 37% to a record $34.9 million, and increased 17% to a record $122.1 million in the fourth quarter and fiscal year of 2013 respectively, up from $25.4 million and $103.9 million in the fourth quarter and fiscal year 2012 respectively. The increase in the fourth quarter and fiscal year of 2013 is primarily attributed to the previously mentioned net sales growth. The Flight Support Group's operating margin increased to 18.4% in both the fourth quarter and fiscal year of 2013, up from 17% and 18.2% in the fourth quarter and fiscal year of 2012 respectively. The increase in the fourth quarter and fiscal year 2013 is primarily attributed to the previously mentioned net sales growth.

Now, I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group to discuss the results of the Electronic Technologies Group.

Thank you, Eric. The Electronic Technologies Group's net sales increased 6% in both the fourth quarter and fiscal year 2013 to a record of $99.9 million and $350 million respectively, up from $94.4 million and $331.6 million in the fourth quarter and fiscal year 2012 respectively. The increase in the fourth quarter of 2013 reflects $3.1 million of additional net sales from a fiscal 2013 acquisition and organic growth of approximately 2%. The organic growth in the fourth quarter of fiscal 2013 principally reflects an increase in demand for certain aerospace and space products, partially offset by a decrease in demand for certain defense products. The increase in fiscal 2013 reflects $8 million of additional net sales from fiscal 2013 and fiscal year 2012, that's fiscal year 2012 acquisitions and organic growth of 3%, approximately. The organic growth in fiscal 2013 principally reflects an increase in demand for certain space and aerospace products, partially offset by a decrease in demand for certain defense and medical-related products.

The Electronic Technologies Group's operating income increased 3% to a record $25.8 million, and increased 7% to a record $83.1 million in the fourth quarter and fiscal year 2013 respectively, up from $25 million and $77.4 million in the fourth quarter and fiscal year 2012 respectively. The increase in the fourth quarter of 2013 reflects the previously mentioned increase in sales. The increase in fiscal 2013 principally reflects the previously mentioned increase in net sales and improved operating margin.

Turning to ETG operating margins, our margin was 25.8% and 26.5% in the fourth quarter of fiscal 2013, fiscal year 2012 respectively, and improved to 23.7% in the fiscal 2013, up from 23.4% in the fiscal year 2012. The decrease in the fourth quarter of fiscal 2013 principally reflects increases in certain selling, general, and administrative expenses and new product development research and development expenses as a percentage of net sales. The increase in operating margin for fiscal 2013 comes mostly from the benefits derived from increased net sales on higher margin products. At this point, I turn the call back over to Larry Mendelson.

Thank you, Victor. Diluted earnings per share, consolidated net income per diluted share increased 22% to $0.44 in the fourth quarter of fiscal 2013. This is up from $0.36 in the fourth quarter of fiscal year 2012. Our consolidated net income per diluted share increased 20% to $1.53 in fiscal 2013, and that was up from $1.28 in fiscal year 2012. The earnings per share increases for both periods were principally derived from continued strong performances from both operating segments. All diluted earnings per share amounts have been adjusted retrospectively for our 5-for-4 stock split, which was distributed to shareholders in October 2013.

Depreciation and amortization expense increased by $2.4 million and $6.1 million in the fourth quarter and fiscal year 2013. That was up from $8.5 million and $30.7 million in the fourth quarter and fiscal year 2012. The increase in both periods principally reflects higher amortization expense of intangible assets recognized in connection with our fiscal 2013 and fiscal 2012 acquisitions. R&D expense increased 17% to $9.4 million in the fourth quarter of 2013, up from $8 million in the fourth quarter of 2012, and increased 8% to $32.9 million in fiscal 2013, up from $30.4 in fiscal year 2012. Significant ongoing new product development efforts are continuing at both Flight Support and Electronic Technologies as we continue to invest over 3% of each sales dollar into new product development.

I would also like to point out that in recent years our Flight Support Group has been adding approximately 300 to 500 new parts manufacturer approvals, or PMAs, and 300 to 400 FAA-approved repairs, or what we call DER per year. We do intend to continue our investment in R&D during fiscal 2014 at similar levels as we experienced in fiscal 2013. SG&A expenses did increase 16% to $51 million in the fourth quarter of 2013, up from $44.1 million in the fourth quarter of fiscal 2012, and they increased 14% to $187.6 million in fiscal 2013, up from $164.1 million in fiscal year 2012. The increase in the fourth quarter and fiscal year 2013 principally reflects the incremental impact from the acquired businesses and the previously mentioned net sales growth, including higher accrued performance awards based on improved consolidated operating results.

SG&A expenses as a percentage of net sales decreased to 17.8% in the fourth quarter of 2013, down from 18.2% in the fourth quarter of fiscal 2012, and increased to 18.6% in fiscal 2013, up from 18.3% in fiscal 2012. Interest expense in the fourth quarter and fiscal year 2013 was $1.2 million and $3.7 million respectively. That was up from $600,000 and $2.4 million in the fourth quarter and fiscal year 2012. The increases principally reflect higher weighted average balances outstanding under our revolving credit facility. This was associated with borrowings to fund recent acquisitions, as well as the special and extraordinary cash dividend paid to shareholders in December 2012. As of October 31, 2013 the weighted average interest rate on our borrowings under our revolving credit facility was a low 1.3%.

Other income in the fourth quarter and fiscal 2013 was not significant. Our effective tax rate of 34.7% in the fourth quarter of 2013 is comparable to the 35% we experienced in the fourth quarter of 2012. Our effective tax rate in fiscal 2013 decreased to 31.1% from 33.8% in fiscal 2012. The decrease is principally attributed to the benefit we recognized in the first quarter of 2013 from the retroactive extension of the R&D tax credit. Also the benefit from higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Corporation leadership comp plan, as well as the deduction for the special and extraordinary cash dividend paid in 2012 -- December 2012.

Net income attributable to non-controlling interest was $6 million and $22.2 million in the fourth quarter and fiscal 2013 respectively, compared to $5.5 million and $21.5 million in the fourth quarter and fiscal year 2012 respectively. The increase in both periods reflects the aggregate impact of higher earnings of Flight Support and ETG subsidiaries in which non-controlling interest are held, partially offset by our purchases of certain non-controlling interest during fiscal 2013 and fiscal year 2012, and this resulted in lower allocations of net income to the non-controlling interest. We are anticipating a combined effective rate in fiscal 2014 for income taxes and non-controlling interest as a percentage of pretax income, and that should approximate 43%, which is comparable to the 2013 rate.

Moving on to the balance sheet and cash flow, as I mentioned earlier, our financial position and cash flow remain very strong. Cash flow from operating activities in fiscal 2013 totaled $131.8 million, or 129% of consolidated net income, as compared to $138.6 million in fiscal 2012. The change in cash flow, decrease if you will, from operating activities principally reflects the timing of estimated tax and payroll payments. And these amounts totaled about $7 million. It was just a switch from fiscal year. It was a prepayment in both actually from cash, and essentially the cash flow was the same in both years, 2012 and 2013.

Our working capital ratio was 2.7 and 2.8 times as of October 31, 2013 and 2012 respectively. DSOs of receivables was 50 days in October 31, 2013. Actually, 48 days if we adjust for the Lucix acquisition, and that compared to 46 days on October 31, 2012. We do continue to closely monitor all receivable collection efforts in order to limit our credit exposure. No one customer accounted for more than 10% of net sales, and our top five customers represented approximately 15% of consolidated net sales in both fiscal 2013 and fiscal 2012. Our inventory turnover rate was 111 days as of October 31, 2013. That compared favorably to 114 days as of October 31, 2012.

Our net debt-to-shareholders-equity was 50.1% as of October 31, 2013, with net debt of $362 million, principally incurred to fund acquisition and the payment of cash dividends, including the special and extraordinary cash dividend paid in October 2013 -- sorry, December 2012. The trailing 12-month leverage ratio, which we define as net debt-to-EBITDA, was approximately 1.64 times as of October 31, 2013. We have no significant debt maturities until fiscal 2019, and with the expanded financial flexibility provided by our recently increased revolving credit facility capacity, we intend to continue to pursue high quality business acquisitions at fair prices.

Now looking forward, the outlook. As we look ahead to fiscal 2014, we anticipate continued organic growth within our product lines that serve commercial aviation markets. We expect overall organic growth within ETG, reflecting growth in demand for the majority of our products, moderated by lower demand levels for certain of our defense products, attributable to continued uncertainty regarding US budget cuts. Based upon our current economic visibility, we are estimating year-over-year growth in net sales to run 12% to 14%, and growth in net income of 8% to 10% over the fiscal 2013 levels, with our consolidated operating margin approximating 18%, similar to 2013. ¶

We anticipate depreciation and amortization expense to approximate $49 million, CapEx to approximate $25 million, and cash flow from operations to approximate $160 million. These estimates include the recent acquisition of Lucix, but exclude additional acquired businesses, if any. Approximately 50% of our estimated net sales growth in 2014 is expected to be organic. Consistent with our long-term growth goals, management continues to target net income growth of 20%, averaging 20%, over the next 1 to 3 years, including the effects of additional acquisition. Consistent with the aforementioned consolidated net sales estimates, approximately 60% of the full-year Flight Support Group net sales growth is expected to be organic, and approximately 25% of the full-year ETG Group net sales is expected to be organic.

In closing, I would like to further congratulate the entire HEICO team on the achievement of a 23-year compound annual growth rate of 17% in net sales, 19% in net income, and 23% in our stock price. To achieve these milestones is a testament to the focus and dedication of each and every individual in our Company. Looking ahead, we will continue to focus on developing new products and services, further market penetration, additional acquisition opportunities, and maintaining our financial strength.

One last comment is for all the people who are investors or potential investors in HEICO Corporation, we thank you very much for your interest in the Company, and one thing that we cannot quantify in the annual reports or the 10Ks is the unbelievable competence and brilliance and hard work of the people who are leading these subsidiary companies. They're truly extraordinary individuals. They are brilliant, they are focused, they are hard-working, they are honest, and without them, the management at HEICO could not perform the way we have with the Company. So I would, on behalf of executive management and the Board of Directors, I want to thank and complement each and every member of our team for the extraordinary performance that they give in.

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

(Operator Instructions)

Your first question comes from the line of JB Groh with D.A. Davidson.

Can you hear me okay?

I can now. Hi, JB.

Just a couple questions for Eric. Maybe could you kind of break down this pretty impressive organic growth rate in the quarter? I mean, you talked a little bit about market penetration, new product introductions, those sorts of things.

Did you get the sense there was any filling the bins at customers? Or how should we disaggregate that 14% growth rate in the different ways that you have to grow?

Hi, JB. This is Eric. Thanks for your question. Yes, I think there was a certain amount of pent-up demand that was out there. We would not characterize it really though as restocking where people are holding more inventory, but there's definitely some of the tired equipment came back and needed a little bit more service than had been expended in the prior number of years, was a little bit of deferred maintenance.

But I would not characterize it, as I said, as restocking, i.e., holding more months of inventory on hand. The strength was really pretty broad-based. It was not in any one area. It wasn't just in the PMA parts area. It was also in the repair and the distribution, specialty product lines.

And they all performed similarly, and as my dad said throughout the call, I really think that this is a result of the culture that we have and the kind of people we have running these businesses as opposed to any one business or product line within that business. These folks just figure out how to drive the sales increases as opposed to, I would say, a rising tide in any particular business, including the PMA business.

So strength across the board, I guess is the way you'd characterize it?

Well, I would -- strength across the board, but really execution even more than strength.

Okay, and then Victor had a pretty nice margin in ETG this quarter, and that's -- typically it kind of goes up and down. What do we attribute that strong margin performance this quarter versus last quarter?

And then also maybe you could kind of remind us the different end market exposures in ETG percentages?

Sure, JB. This is Victor. I would say, first the answer to the first question as to the margins, or the counts for the margin, I would say it's mix, more favorable mix. And as you know, I think we pointed out, that really does shift around over the course of the year, and so it was just more profitable and higher margin product that was coming out during the period.

In terms of how it breaks down, if you look at our business in the ETG. Somewhere around a third, maybe 35% or so is defense-related. Probably a quarter of that is foreign-destined. So it may be to US companies but that's going to a foreign country.

So about three-quarters would be domestic. Then about 20% of our business in ETG is space, somewhere in that neighborhood, close to that. Commercial aviation and commercial aerospace would be somewhere around the 10% range.

And the balance of it, the roughly remaining third or so, comes from a variety of markets, probably the largest of which is for medical equipment, products going into medical equipment like power supplies, high voltage cable assemblies and so on. And then a variety of other markets that we serve, some of it's pro audio and broadcast markets, some of it is telecom, some of it's computer, just general electronic markets as well from there, and some other industrial markets.

Got you, okay. And then one quick one for Larry. On your CapEx outlook for the year, I think typically in the past you've said that's sort of the wish list, doesn't necessarily mean that we spend that much. Can you comment on kind of CapEx spending plans for 2014, whether that's -- are there specific things in there, or is it just the normal course?

Well, as I've said in the past, the way we do this, we have a bottoms-up wish list from all of the subsidiaries. They give detail plans for what they intend to need for CapEx for the following year.

And they normally overestimate what they're going to use because if they come to the well and they don't have the budget allocated by the Board, then it becomes a problem for them to get it approved quickly. So I think in the past, Tom can tell you, but I think in every year, we have overestimated what we will spend in CapEx.

I can't guarantee it, because maybe they will find that they need it, but normally our CapEx is a wish list and the actual CapEx expenditure is significantly less than what it was. And that was the case in 2013, and in previous years too.

But I think we try to make it all-inclusive so we don't have any surprises and we don't have the funds, because if they need a new machine or they need some equipment to fill an order or please a customer, we want to be able to respond very quickly. One of the advantages we have by having a very flat corporate bureaucracy is that the business unit leaders can get approvals with a phone call.

And once we have the CapEx budget and we've scrutinized it long before they ever ask for it, we're pretty familiar with what they might require. So all they need is a call, a justification why they're calling for it now, and they can make one call to Eric or Victor, and then get my approval.

And we're talking about an hour. And there's no delay and there's no corporate bureaucracy that has to be followed in order to get these -- they're all done in advance, pre-planned. So it works very well for us.

Good.

Does that answer your question?

Yes, very much so. Thank you guys for your input, and congratulations on the year. Thank you.

JB, thank you very much.

Your next question comes from the line of Arnie Ursaner with CJS Securities.

Congratulations on a good quarter. I know you try to be conservative as a team, but at least one number in your guidance for next year makes no sense. Your operating margin in the range of 22% to 24% for ETG, you haven't had a number that low since 2008.

So perhaps (technical difficulties) could you comment, I've got to believe somewhere in there there's an amortization expense, because your mix towards space and aerospace should lead to higher margins. So what are we missing here?

I'm going to let Tom respond.

Yes, Arnie. This is Tom Irwin. Relative to our guidance and our expectations, operating margins, as you're pointing out, our commentary was 22% to 24% depending largely on product mix. And as Victor mentioned and Larry mentioned, the big uncertainty on that side is the defense.

We have some very high margin defense product, we have some low margin. But so that's the number one, the explanation for the swing. If you look at the change from 2013 to 2014 guidance estimates, you're exactly right.

If you look at principally the acquisition of Lucix, our amortization of intangibles in 2013 in that segment ran about 4% of sales, with the Lucix at about 5%. So you're talking about roughly 100 basis points of additional amortization, which brings it, if you will, to the low end of the range. And we hope to maybe pick up some if the mix helps us. But that's basically it, you're right.

Okay, and then my other question is your SG&A had a pretty sizeable jump, and again, well deserved discretionary bonuses or performance-based bonuses. But did you also have any M&A transactions that concluded without an outcome that you had to write down the expense?

No.

The answer is no.

This is Carlos. There's no unusual expenses related to any acquisitions that have not closed or that are in process that ran through there during the fourth quarter.

Okay. You're talking about a roughly $13 million jump year over year in D & A, but can you give us the Q4 D&A number, please?

Yes, we'll get that handy. I mean roughly, I can tell you the $49 million for next year is roughly $28 million in amortization and $21 million in depreciation. And again, the big jump is from 2013 to 2014 is amortization, and additional depreciation on the acquired businesses.

Okay, thank you very much.

Okay, Arnie. Thank you.

Your next question comes from the line of Julie Yates Stewart with Credit Suisse.

Good morning, guys.

Good morning, Julie.

A question on the free cash flow. The free cash to net income conversion in 2013 was, I believe, 110% which was below where you've been running over the last five years, which I think is around 150%. And next year you're guiding to 120%.

So how should we think about the conversion over the next three to four years? Can you return to that 150% level, or is there a reason that maybe you've run a little bit lower as the business continues to grow?

Julie, this is Tom Irwin. Our outlook for next year is basically roughly -- well, our guidance refers to a cash flow from operating activities to be consistent, and that's about 140%. It was down a little bit this year to 129% of net income, but again as Larry mentioned, that's a timing thing of between 2013 and 2014, some taxes and payroll deposits.

But we're still looking at about 140%. Historically that cash flow from operating income -- cash flow from operating activities relative to net income has been running about 150%. So not a big swing. Some of the businesses might have a little different mix in working capital requirements and our guidance estimates. And again, we do, particularly out of the box early in the year, try to be conservative. We want to give expectations that we're highly confident of. We may do better in the cash flow from operations than those numbers, but I think it's not materially different. It's not a change in the fundamental strategy or requirements of our businesses.

As Larry mentioned earlier, the CapEx number, which is probably included in your free cash computation, typically we only spend 80% to 90% of that. So that will drive up any estimated free cash based on those numbers.

Julie, I think, I have to look back, but just my recollection, I think as Tom said, coming out of the box, we kind of guide to the low side and normally it creeps up. Also, I think that the Lucix amortization is a very confusing bit of accounting because there's a contingent payout, and depending upon the contingent payout we have to estimate what the contingent payout may be, and you might as well take a dart and fling it at the Board to try to figure this thing out.

The accountants have really done a number on us and they tell us estimate. Well, if we estimate, we would know what it is and we wouldn't have to have a contingent payout. So the whole thing to me makes absolutely no sense. However, we have to follow GAAP and we have to make some kind of an estimate. So depending upon how the estimate comes out, we could have greater intangibles, because we pay more because the Company earned more. And then we would have greater amortization.

So it's a very, very confusing computation, and I could tell you at our Audit Committee meeting and the Board meeting we go over this, and you really -- it's a very difficult thing, but we think we're close to it. We've done our best, but that also could influence what ultimately is the add-back from the amortization.

Okay, and did that have anything to do with coming in a little bit below where you had initially guided for the year on cash flow from ops? I think the initial target was $140 million?

No, no, not at all. The big thing is what I mentioned. There was about $7 million of -- in the payroll and the income taxes, we overpaid income taxes and it fell into FY13. And so it's really -- the tax portion was a prepayment of 2014. So that was -- it's really not significant.

The other thing was a payroll transfer that was done on the 31 which applied to November, and it was -- the total of them was a swing of about $7 million. If you add that back, which you really should do, it comes out to the same as last year. So the answer is no, the Lucix transaction had nothing to do with that.

And then just last question on inventories, was the increase in the year, is that primarily in the ETG business or FSG, or is that in both?

Most of the increase, Julie, in the inventory relates to Lucix acquisition. We had an increase due to the Reinhold acquisition that we acquired about five months ago. And then the rest of it, frankly, is due to organic growth and our expectations for the coming quarters. So nothing unusual going on in the inventory line other than that.

And again, the turns were actually down, down slightly.

Okay, great. Thanks, and have a happy holiday.

Thank you. You too, Julie.

Your next question comes from the line of Eric Hugel with S&P Capital.

Can you guys hear me?

We can, Eric. How are you?

I'm doing well. Eric, with regards to your margin expectations for next year, relatively flat for this year, you are looking for some pretty decent organic growth. Can you talk about why you're not going to see margin expansion?

I'll answer, Eric, in terms since I kind of focused on the forward-looking stuff, but I would say within Flight Support Group, as we're pointing out, we are cautiously optimistic about the commercial aviation growth. On the other hand, that's about 80% of FSG.

The other 20% in particular, some defense component. As we mentioned in the details of the call, there is some level of uncertainty, and perhaps some lowering of sales, they could be down 5% or 10%, something like that in some of the defense components. So bottom line is when we try to estimate the impact of the upside on the commercial aviation, but some pressures on some product within the defense product lines that are relatively high margin, that tends -- the caution, if you will, about not trying to forecast improvement in operating margins, but more in the flat area.

Again, as you're aware, we're constantly looking to improve operating margins, and often are able to pick up a couple basis points. But again to come out of the box, given the uncertainty, again particularly in the defense area, we're cautious, and feel much more comfortable beginning the year with flat margins in that segment.

Did you say defense sales in FSG is about 20% of segment?

No, I said commercial aviation is about 80%, defense is running, with the addition of Reinhold now, is about 12%, and then about 8% runs the other, primarily industrial product. So the 20% is both defense and industrial, and then (multiple speakers) commercial is roughly 80%.

Okay, that makes sense.

It's sort of a pro forma with Reinhold being in there for a full year.

Okay, great. Can you talk about -- Larry, can you talk about the M&A pipeline, both in terms of activity and pricing? And is there more opportunities in one area versus another?

No, I would say we're an equal opportunity buyer. We're opportunistic, and wherever the opportunity presents itself, I would say that the -- normally at this time, I think the pipeline is sort of normal. We do see prices, requested prices, pushing up a little bit, nothing significant that we can't handle or we're not talking about -- the things that we look at normally, we like to pay 5 to 7, 7.5 times. So maybe they are pushing up to 8 or 8.5.

And we'll still buy something at 8 and 8.5 if we can feel highly confident in the first year that we own them that the growth of the Company will result in us having an effective multiple of some wheres between 6.5 and, say, 7. So the answer is no, we have opportunity on both sides. And it fluctuates throughout the year. Sometimes you have Flight Support, a lot of opportunity there. Other times you have a lot of opportunity in Electronic Technologies, but nothing unusual.

And just two quickies, if I can. In terms of how should we think about share creep for next year? And for your tax rate, are you expecting the R&D tax credit to be renewed or not? How is that -- is that factored in?

I don't think the R&D tax credit's factored in, because the law right now doesn't permit us to do that. So if they change the law, if they amend it, which they've done over a number of years, then we'll reflect it in the quarter that it's approved. So when you say share creep, I don't --

I think what he's referring to, and if you look at our fourth quarter share count, it's gone up and we're running, I think in our internal estimates, if you will, we're using around 67.3 million, 67.4 million roughly, which is -- reflects the fact that it's up a bit, basically based on dilutive options.

Okay. We have no intention at this time of issuing equity or anything like that.

No, no, I understand that. But, and just Carlos, what's the value of the R&D tax credit to you guys?

The value of the R&D credit on an annual basis?

Yes.

It would be $6 million.

$6 million. Okay, great. Thanks guys.

Okay, thank you.

Your next question comes from the line of Sheila [Piaglo] with Jefferies.

Good morning, everyone. So my first question is on FSG. What sort of flight hour growth are you embedding in your guidance for next year, and how do we think about the remainder. whether it's new products or share gains?

And would it be possible to be a bit more granular on what you're seeing in the after-market, whether it's regional trends or by aircraft platform?

Sheila, this is Eric. With regard to the available seat mile forecast going forward, again we do a bottoms-up budget by operating unit, and their budgets sort of take into account consensus on that. which is sort of roughly 5%.

And with regard to areas of focus, we don't like to go into too much detail there for competitive reasons, but again, we're seeing the -- our guidance assumes strength across the -- equal strength across the business. We don't really see -- you wanted a little bit of color, getting a little more granular.

We don't see any particular areas of strength, such as PMA or repair. It's really very, very much broad-based. And I think the reason why HEICO is outperforming the market is, again as I said, really is a result of our people and the culture that we develop in the business, and the kind of teamwork that the companies operate with, and have operated with for a very long time.

This is not -- some big companies come out with programs every couple of years on how they're going to change how they operate in order to increase immediate results. This is not as a result of any of those kind of programs. It's the result of our folks just being properly motivated, having the right people, having the right teams in place who frankly probably wouldn't do well in other organizations that are more bureaucratic and layered with all sorts of nonsense. So I think that it's just outperformance, really in all of the areas, whether it's large commercial, regional. It's really across the board.

Okay, thank you. I appreciate that. Then maybe if you could provide more color on the integration progress within Reinhold and Lucix. And if you could talk about those two properties at all and where you're seeing opportunities for sale synergies, or any efficiencies within those platforms?

The answer is that with regard to Lucix, we think there are some synergistic opportunities with some of the other companies that we have, and we're investigating it, we're looking into it. None of our assumptions -- when we make acquisitions we rarely assume that we're going to have synergies.

We take a conservative approach and we just assume little or no synergy. So all these projections and guidance that we've given you assume little or no synergy, but sometimes we have it. As far as Reinhold goes, the same thing. We're looking for opportunities, but we don't build in any assurances.

But then there's some opportunities to open some doors, which we've done effectively. But again, the HEICO strategy is to make sure that the individual business heads have full responsibility for the control of their business. So they've got the authority, they've got the responsibility.

In the corporate office we try not to mess around. We want to be helpful, we want to open doors, but we want them to be fully responsible and tell us how we can help them. So most of these numbers are not due to any synergies, other than really infusing the HEICO management style, which is making sure that we back up our people, and we're there for advice and consultation, and make sure they build the best teams possible, and that we really focus on how those people are taking care of. Because if they're happy in what they do, they remain doing what they do, they work hard at it.

When things don't go -- when things go wrong, as occasionally they do, we don't beat them up over it. We talk to them about what we need to do to go forward, and it's really not due to corporate initiatives from the top telling them how to operate synergistically.

Okay, understood. Thank you very much.

Thank you, Sheila.

Your next question comes from the line of Stephen Levenson with Stifel Nicolaus.

Hello?

Steve, good morning.

How's everything?

Good.

Could you give us maybe a little bit broader picture of how you're looking at the trends in commercial aerospace right now, particularly how something like the American Airlines/US Airways merger might affect HEICO? And how things are shifting, particularly overseas, with low cost carriers, who it seems like are outsourcing more of the service and doing less with the OEMs?

Yes, Steve. This is Eric. Again, with regard to any specific airlines or customer's products, we don't like to comment, because out of respect for confidentiality, and also not to give our competitors the heads-up, but needless to say, we do a lot of work with both American and US Airways. They will continue to operate as two separate airlines for the next while. So we will continue to support them, and we're optimistic about the future.

With regard to the LCCs and the other airlines around the world, we get in there, we talk to them. Again, typically when an airline is taking a high percentage of their current fleet as new equipment, they don't realize what's about to come down the road and hit them in terms of prices and costs. So typically as that fleet matures, that's when it becomes more of an opportunity for us. But we are very active around the world, making sure that we stay out there with the customers and support them when they need our products.

Okay, thanks. And in terms of aircraft that have been put into service over the last several years, and the ones that are still going in it at higher rates, do you see a sweet spot period approaching, or do you think that's still well off in the future?

Yes, I think that you've got to balance the new aircraft coming in with some old aircraft coming out. I think that's all really embedded in our numbers. I wouldn't -- we're not anticipating, really, some huge sweet spot coming in there. I think it's really a lot of blocking and tackling and execution on developing new products, making sure we sell the existing products to people who aren't buying them, acquiring other businesses.

But no, we're not anticipating, really, the tide to rise and us just to get lucky and sort of sit there and be the beneficiary of all sorts of good macro trends. I think it's very complex to be able to model all that out, and it's not really possible. So instead we try to break it down into small tasks where our businesses understand where they need to deliver, and I think that's why we're successful doing it.

Great. Thanks very much, and Happy Holidays, of course.

Thank you. You too.

Your next question comes from the line of Chris Quilty with Raymond James.

Just wanted to circle back with comments that Eric made earlier about the channel inventories, and I was just hoping you would clarify that a little bit. It sounds like you're seeing channel inventories, is it fair to say, at a normalized level? Or was there some channel fill that you think you saw over the past two quarters that helped boost the organic growth?

We think that the airlines continue to run lean. If you look at organic growth, it comes from, I suppose in theory it comes from three places. One is obviously new products, which are defined either as parts we haven't sold before or parts we haven't sold to that particular customer. The second area would be if people increase the amount of inventory they want to keep on hand, number of months supply, and we don't see that.

The third would be sort of the natural evolution in the repair cycle, where in good times they tend to do more maintenance than in bad times. And then what happens is sooner or later the stuff that they fix in the bad times comes due for service. And I think we did see some of that third -- we saw the first and we saw the third portion in our -- the second half of 2013, whereby we're very successful selling new parts to both new customers as well as developing new stuff. And in addition to airlines just needing a little bit more, because the stuff that came in was in slightly worse condition than they had anticipated. But no, it's not what we would define as traditional restocking, i.e., holding more parts on hand.

Airlines are not coming to us saying, we're holding whatever it is one to three months of inventory. Now we want to hold two to four months, or five to six months of inventory. That's not happening, at least from our perspective. I mean, maybe its happening for other people, but it's not happening with the customers that we're working with.

Okay. How about the fourth lever, which is pricing? Have you seen any changes, either in your own pricing increases or that of the OEMs? And where do you think you sit in the sort of normal range of price increases that you've seen over time?

That's a very good point. I'm glad you mentioned it, and you can see sort of from my thinking, we don't normally consider pricing to be a huge opportunity for us. We do continue to raise our list prices consistent with OEM prices, but normally when we have a customer whose locked in with us, we tend to be very customer friendly, maybe overly customer friendly. And that's sort of been the culture of the Company, for right or for wrong. And OEMs continue to increase prices at a significant clip.

Some of the acquisitions that you've seen out there have been done at very high multiples, and as a result they've got to cover the cost of capital and what they pay for these businesses. So as a result, they've jacked up prices significantly. So I think that that is an opportunity for us probably to be a little bit more aggressive, and clearly when list prices go up and we develop a product, our price would be set against the current list price at the time we offer the part. So there probably is a little bit of a little more opportunity in the pricing area than there's been in the past, but it's not been a major driver for us.

And that is sort of interesting, because with our organic growth rates of, say, 14% on FSG in the fourth quarter, that was done really with volume. Very, very little of that was pricing, If you want to say 1% or 2% was pricing, the rest was volume. I mean, that really is -- I think it shows to my dad's point about the strength of our people, because they're not doing it by just jacking up monopoly leverage positions.

Got you. Great. Thank you very much, and Happy Holidays to everyone.

To you too, Chris.

Your next question comes from the line of Michael Ciarmoli with KeyBanc Capital Markets.

Good morning, guys. Thanks for taking my questions. Eric, maybe just one question that I have. I think you guys mentioned in the prepared remarks regarding some of the new product developments, new parts, 300 to 500 and 300 to 400 DER repairs.

Can you maybe elaborate what sort of the target aircraft or target engines are? I mean, are you still -- are you starting to target some of the newer planes that are entering into service? I think it would be maybe premature for the 787, that still seems to be a ways out. But can you give us of sense of what exactly you guys are developing, both on the product and repair side?

Yes. Again, we're fairly sensitive about going into too much detail for competitive reasons. But needless to say, the products that we develop are the products that are used most often. So you can see there's obviously a lot of symmetry. [737] and A320 because that's sort of obvious. And whatever is typically flown. I mean, if you just look at the fleet that's out there, that's really what we go after.

As far as talking about any particular OEM, we're reluctant to do that, obviously for competitive reasons, but we're active in a lot of different areas. Again, most of our sales now, over half of our sales come from non-engine, and well over half of our new product development efforts are in the non-engine area. We continue to develop engine parts, but just for us as a percentage of the total, it's less significant than it used to be.

We used to be 100% engine, and now we're less than 50% engine. We see a lot of growth in that area as airlines have come to us to focus and really build out that product space. And I think there's a lot more non-engine product that we will be going after. In terms of getting into detail about where non-engine, we would rather not do that because we don't want to get people concerned.

Again, I think the press really helped us about 10, 15 years ago talking about the PMA phenomenon, that it was going to create all of this savings opportunity, but it also can unnecessarily scare certain competitors and OEMs into becoming fearful that their business model doesn't work, and that's absolutely not true. If you look at the percentage of PMA as a percentage of the large commercial transport spares market, we're guessing it's roughly in the 2% area.

So this is really tiny, and when the OEMs have got the ability to raise prices mid- to high single digits or some of them even more than that, whatever they may lose to us at a couple of customers is not significant. So that's why we're reluctant to go into great detail by customer type or product type, because we don't want people to get unnecessarily concerned. The OEMs still have outstanding business models, and we just help our customers sort of in a small way.

Okay, and then just kind of maybe directionally or strategically thinking about the environment, are you guys hearing or seeing from your customers, I would imagine if carriers decide to keep some of these older planes in service longer, that might be a net positive for you. Are you hearing any chatter among the airlines that some may be thinking about employing more of the Delta type strategy, where they're actually willing to take those older planes, like the 717s, just to lower their capital costs? Are you seeing trends out there like that, that would keep those revenue tails going for even longer on some of those older, more mature airplanes?

It's sort of a mixed bag. I mean, you hear that in some places, and then you hear in other places they're focusing on new equipment. I think Delta, they're really exceptional operators, and they know how to operate. They've got their maintenance costs under control. They run a very tight airline.

I think, frankly, it's amazing if you look at the job that Richard Anderson and his team have done over the last five years. They're very smart. They go after low capital cost equipment and they make it work. But I think they have the D&A to be able to do that. Not every airline has got that D&A. So to answer your question, yes, I think some people are looking at Delta and trying to replicate that model.

Others, of course, have full order books and are going to get a maintenance holiday as a result of the full order book. But they know that they're going to pay the price down the road, and the price for spare parts for each successive generation of equipment is multiples over the prior generation. So it may stay on way longer, or maybe the equipment may or may not fly for as many years, but the price point, the price of the part is significantly higher. So I think it's a mixed bag.

I wouldn't -- but I wouldn't conclude that equipment is really going to be staying out there longer. I mean, certainly if you hear Boeing and Airbus, they want to sell a lot of new equipment, and they're doing everything they possibly can. If interest rates go up, capital costs go up, that will become more difficult to do.

Got it. That's helpful. Thanks guys, and great quarter.

Thank you.

Your next question comes from the line of Ken Herbert with Canaccord.

Hi, good morning.

Good morning, Ken.

Hi, pretty good. Just a first question, if I could for Victor. When you look at you organic 3% to 4% growth heading into FY14, can you provide any granularity on how you're looking at specifically defense versus space versus maybe the medical and industrial markets?

Yes. So the answer is, we're expecting internally that the domestic defense market and our defense sales would be affected by that. We're expecting a budget cut. We would think the way it would filter through would be somewhere in the 5% to 10% range.

Now of course we don't know with certainty at this point. Our information is pretty much the same as everyone else's on that, but that's kind of what we think we are looking at. We expect growth in space, in our space markets. We think we have opportunity there, in particular on the commercial side. We expect to see growth in commercial aviation, and some growth in our other markets. So that's kind of how it balances out and how we get to those numbers.

Okay. So defense -- I guess international defense, for the piece of your sales, the 25%, give or take, that go to, ultimately to international customers, is it fair to say that you're thinking of that as maybe flat to up slightly? Probably doing better than the down 5% to 10% on domestic defense?

Yes, I think that sort of thinking right there.

Okay, great. And Eric just one question for you. On FSG, can you remind me what percentage of your business you might consider as part of a long-term agreement. and maybe how that's been trending for you? Specifically within the commercial aerospace side over the last year, maybe thinking around that, heading into 2014?

I would think, Ken, that it's, I would say consistent with past levels. A majority of our business is under a long-term agreement. If we're going to be very price friendly to customers, it's only fair to expect multi-year agreements that they are going to stick by us, and we'll have that commitment. So I would say that there's really been no change to the business model there.

Great. Thank you very much guys, and Happy Holidays.

Thank you. You too.

Your next question comes from Jim Foung with Gabelli & Company.

Hi. Good quarter, everyone.

Thank you, Jim.

I just have one question, just about the PMA market. I was just wondering if you could just talk a little bit about the dynamics there. Eric. I think you mentioned it's like 2% of the industry. Has that been growing over time? Are you seeing more airlines accepting PMAs more? And so there's a slow migration of kind of growth from OE parts to PMA?

Yes, I think there's continued focus on cost reduction at the airlines. I think PMAs are gaining momentum. Of course you've got the offset of new customers, new parts. The offset to that is equipment that's retired, and that's all figured into this complex equation.

The reason I think it's hung sort of around that whatever the number is, SH&E is at 2% or 3%, or whatever, it's sort of hard to get your hands around the exact number, but the reason it's sort of staying at that level is of course the OEM -- my dad always has spoken about the theory of the expanding universe. The OEM prices continue to go up by just, say, 5%, 6%, 7% per year. And that frankly dwarfs the PMA percentage of the total market. So I think that it will continue to hang around in this area, it will go up a bit.

Remember also that the OEMs don't give up business. We have to fight for every piece of business that we have. They are not -- the days 20 years ago where they really didn't care if they lost it, those have been gone for well over 10 years. They fight for every piece of business. And the greater challenge for us is getting the airlines to go and approve the use of these parts and making sure that they continue to grow their engineering staffs and continue to approve more parts for use.

It's not -- there's really not for us a funnel at the FAA. We've got a very good relationship and a lot of credibility with the FAA built over decades. So we're able to get PMAs there, but in terms of as a percentage of the market, I see it growing but not growing in any one year a huge amount. This is not a threat to any OEM's business model.

But how long does it take from the time you start talking to an airline about PMA parts to the time they get convinced to buy from you?

Well, if they don't -- if they're not doing much maintenance because they have all new equipment, they have to feel the pain of the cost of maintaining this equipment. So they have to be operating the equipment for a number of years for that to happen.

And then we're in there, we're talking to them. And typically it takes roughly a year from the time we identify a part until we have it. Sometimes it can be as short as three months, or sometimes it could be even longer, depending if it's very complex.

But if you want to assume until we really have sufficient parts on the shelf, it's roughly a year. Then we build the market share over the next two years, three years or so. And that's when we start harvesting the sales from a particular part.

So I was just wondering if the organic growth you're seeing in the after-market, if it's for more of the relationship building you've done over the previous years, and that's what's driving the momentum for you, quarter by quarter?

Right. Yes, and I agree with you. I think we have very strong relationships to the airlines that we've invested in, and again, it's not developed in any one, two, three or five years. These are very, very long-term relationships. And I think yes, that's one of the reasons why we have the growth rate that we've got, because we're able to introduce products much more quickly than others, and they approve them more easily than other companies.

Okay, great. Thanks so much, and I wish you all Happy Holidays, and have a great New Year.

Thank you, Jim. Same to you.

(Operator Instructions)

At this time there are no questions in queue.

Thank you. Again, I want to wish everybody out there on this call a very happy, healthy New Year, wonderful holidays, and we look forward to either seeing you at one of the conferences that are coming up in 2014, or we'll be speaking with you at the end of the first quarter of FY4. So that is the end of the conference call, and we are now done. Thank you all.

This concludes today's conference call. You may now disconnect.