HEICO Corp (HEI.A) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the HEICO's FY14 fourth-quarter and full-year financial results.

(Operator Instructions)

Before we begin, I would like to inform you that certain statements made in this 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, these forward-looking statements as a result of factors including, but not limited to, lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services. Product development for product specification, cost and requirement, which could cause an increase to our cost to complete contracts.

Governmental and regulatory demand, 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, our ability to introduce new products and product pricing levels, which could reduce our sales or sales growth, product development difficulties which could increase our product development costs and delay sales. Our ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risks, interest and income tax rates and economic positions within and outside the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenue. And defense budget cuts which could reduce our defense-related 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, filings on Form 10-K, Form 10-Q, and Form 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, except to the extent required by applicable law. I would now like to turn the call over to HEICO's Chairman and CEO, Laurans Mendelson. Sir, you may begin.

Thank you very much and good morning to everyone on the call. We do appreciate you joining you us and we welcome you to HEICO's fourth-quarter and full-year FY14 earnings teleconference. I'm Larry Mendelson, Chairman and CEO of Heico Corp and I'm joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group; Tom Irwin, HEICO's Senior Executive Vice President and Carlos Macau, our Executive Vice President and CFO.

Now, before reviewing our operating results in detail, I'd like to take a few minutes to summarize the highlights of our fourth-quarter and our full-year fiscal results. Consolidated fourth quarter FY14 net sales represent record quarterly results and that was driven principally by continued organic growth within flight support and continued year-over-year net sales growth within ETG. Consolidated net income per diluted share increased 9% to $0.48 in the fourth quarter of FY14, and that's up from $0.44 in the fourth quarter of FY13. Consolidated full-year FY14 net sales, operating income, net operating cash flow and net income represent record results, principally driven by record net sales and operating income within flight support and ETG.

Consolidated FY14 net income and operating income are up 18% and 11% on a 12% increase in net sales over FY13. Our consolidated operating margin remained robust at 18% in FY14, and was comparable to FY13. Consolidated net income per diluted share increased 18% to $1.80 in FY14, up from $1.53 in FY13.

The Flight Support Group set an all-time annual net sales record in FY14, increasing 15% over FY13, and that increase principally reflects organic growth of approximately 9%, and additional net sales contributed by a FY13 acquisition. The ETG group set an all-time annual net sales record in FY14 by increasing 8% over FY13, and that increase principally reflects organic growth of about 2% and additional net sales contributed by a FY13 acquisition.

Cash flow, which to me is probably the greatest indicator of quality of earnings, cash flow provided by operating activities increased 45% to a record $190.7 million in FY14. And that represented 157% of net income and it also exceeded our prior expectations of about $160 million. This $190.7 million compared to $131.8 million in FY13.

As you all know, HEICO is a great cash generator. As of October 31, 2014, the Company's net debt to shareholders equity was 40%, with a net debt which we define as total debt less cash, of $308.9 million. Additionally, our net debt to EBITDA ratio was 1.23 times, as of October 31, 2014, compared to 1.64 times as of October 31, 2013. That debt to EBITDA ratio is a very, very low number at 1.23.

I do want to mention a macroeconomic matter that has really taken center stage in the news world in the past few weeks, probably the last three months, and how oil prices are expected to impact the longer lives for existing aircraft. Assuming oil prices stay low, we believe and so do a number of analysts and writers who are coming out with publications daily, that should have a long-term impact on our business. Because we expect that aircraft that used to be gas guzzlers and would be normally replaced because of the cost of operation, will be run by airlines for longer periods of time, so there are two sources for aircraft purchases, two reasons for aircraft purchases.

One, because growth of passenger miles and airlines need new aircraft to supply seats or increased demand. And number two, for the replacement market. As planes grow older and become expensive to operate, there is a demand from the aircraft manufacturers to supply these new aircraft. We believe that those replacement aircraft will be less economic and airlines will continue to fly and repair and overhaul existing aircraft to a greater extent. So for the long term, we think this is a macro -- big macro positive for us, as long as oil prices remain low.

In November 2014 we reported that our 3D PLUS subsidiary supplied mission-critical components on the European Space Agency's Rosetta program, which successfully landed a robotic probe on a comet for the first time in history. And furthermore, in December 2014, we reported that 3D PLUS and our VPT subsidiary, each supplied high reliability electronic products for NASA's Orion program. And I want to point out that although these programs in of themselves are not major profit generators for the Company, what they do show is a very, very high ability for HEICO's subsidiaries to produce extremely high reliability parts in electronics. And this helps our overall reputation as being a Company of supplying extremely high quality product, electronic engineering capability to the market.

And we received a number of very positive comments from companies who purchase from us and this is very, very important for HEICO's long-term reputation. Once again, our fellow HEICO team members have us overflowing with pride and our subsidiaries have repeatedly supplied successful and critical components on many important space missions. And in particular, we congratulate both the teams at 3D PLUS and BPT -- VPT on these tremendous accomplishments.

On Monday past, our Board of Directors increased the semiannual dividend by 17% over the prior semiannual dividend, which is payable on both classes of common stock. The dividend represents our 73rd consecutive semiannual cash dividend since 1979, and it will be payable on January 19 to shareholders of record on January 5, 2015. I would like to now introduce Eric Mendelson, who is Co-President of HEICO and President of HEICO's Flight Support Group and he will discuss the results of flight support. Eric?

Thank you. The Flight Support Group net sales increased 15% to a record $762.8 million in FY14, up from $665.1 million in FY13. This increase resulted from organic growth of approximately 9%, as well as additional net sales of $37.7 million from a FY13 acquisition. This organic growth principally reflects new product offerings and continued favorable market conditions in the commercial aerospace sector, resulting in net sales increases within our aftermarket replacement parts and repair and overhaul services product lines.

The Flight Support Group's net sales increased 3% to $194.8 million in the fourth quarter of FY14, up from $189.6 million in the fourth quarter of FY13. All of this increase was generated by low double-digit organic growth in our aerospace markets, reflecting new product offerings and continued favorable market conditions within our aftermarket replacement parts and repair and overhaul services product lines, partially offset by softer demand for certain industrial and defense-related products within our specialty product lines.

The Flight Support Group's operating income totaled $33.2 million and $34.9 million in the fourth quarter of FY14 and FY13, respectively. The decrease in fourth quarter of FY14 principally reflects a lower gross profit margin, resulting from the previously mentioned decrease in demand for certain products within our specialty product lines. The Flight Support Group's operating income increased 12% to a record $136.5 million in FY14, up from $122.1 million in FY13. The result in FY14 is principally attributed to the previously mentioned net sales growth.

The Flight Support Group's operating margin was 17.0% and 17.9% in the fourth quarter and full FY14 respectively, as compared to 18.4% in both the fourth quarter and full FY13. The decrease in both the fourth quarter and in the full FY14 principally reflects the previously mentioned impact of decreases in demand for certain products within our specialty product lines, as well as increases in certain SG&A expenses to support the higher net sales volumes in our commercial aerospace business.

With respect to FY15, we currently estimate growth in the Flight Support Group's full year net sales of approximately 8% to 10%, and a full year Flight Support Group operating margin approximating that of FY14. This growth largely excludes any potential benefit from increased utilization of existing aircraft due to lower fuel prices. Now we 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 8% to a record $379.4 million in FY14, up from $350 million in FY13. respectively. The fiscal year's increase is attributed to organic growth of approximately 2%, as well as additional net sales of $23.5 million from a FY13 acquisition. The organic growth principally reflects an increase in demand for the Electronic Technologies Group's space and aerospace products, partially offset by the previously anticipated decrease in demand for certain of our defense products.

The Electronic Technologies Group's net sales increased to $100.1 million in the fourth quarter of FY14, up from $99.9 million in the fourth quarter of FY13. This increase came mostly from additional net sales of $4.4 million from a FY13 acquisition. The Electronic Technologies Group's operating income increased 7% to a record $88.9 million in FY14, up from $83.1 million in FY13, and increased 3% to $26.4 million in the fourth quarter of FY14, up from $25.8 million in the fourth quarter of FY13. The increase in the full year of FY14 principally reflects the previously mentioned organic net sales, as well as reductions in accrued contingent consideration, partially offset by less favorable product mix, impairment losses and lower than expected operating income from a FY13 acquisition.

During the fourth quarter, we reduced the estimated fair value of contingent consideration and impaired certain intangible assets associated with the FY12 acquisition that resulted in a net benefit to diluted earnings of $0.03 per share. Additionally net income per diluted share in FY14 includes a cumulative net $0.12 per share benefit from the previously mentioned and reported reduction in accrued contingent consideration related to a FY13 acquisition that was partially offset by the impairment losses related to the write-down of certain intangible assets, and lower than expected operating income at the acquired business.

The Electronic Technologies Group's operating margin improved to 26.4% in the fourth quarter of FY14, up from 25.8% in the fourth quarter of FY13, and was 23.4% in FY14 which approximated the 23.7% we saw in FY13. The increase in the fourth quarter of FY14 mainly resulted from the net impact of the previously mentioned reduction in contingent consideration, partially offset by the less favorable product mix and impairment losses.

With respect to FY15, we currently estimate the Electronic Technologies Group's full year net sales growth and full year operating margin to approximate that of 2014. FY14, that is. At this point, I'll turn the call back over to Laurans Mendelson.

Thank you, Victor. Moving on to diluted earnings per share. Consolidated net income per diluted share increased 18% to $1.80 in FY14, and that was up from $1.53 in FY13. And it increased 9% to $0.48 in the fourth quarter of FY14, up from $0.44 in the fourth quarter of FY13.

The increase in full FY14 and fourth quarter principally reflects the previously mentioned record consolidated sales growth as well as the net benefits from the previously mentioned ETG group acquisitions. Depreciation and amortization expense increased by about $600,000, and $11 million in the fourth quarter and full FY14, and that was up from $10.9 million and $36.8 million in the fourth quarter and full FY13. That increase principally reflects the incremental impact of higher amortization expense related to intangible assets and depreciation expense attributable to FY13 acquisitions.

Research and development expense was consistent in the fourth quarter of FY14 and 2013, both periods approximated $9 million. For the full FY14, R&D expense increased 14% to $37.4 million, and that was up from $32.9 million in the FY13. Significant ongoing new product development efforts are continuing at both Flight Support and ETG, as we continue to invest between 3% and 4% of each sales dollar into new product development to support future growth strategies.

As you all know, HEICO focuses and concentrates on R&D development to introduce new products as well as improving existing products. That is a major strategy that we adhere to and we feel that has been the single most important driver of HEICO's growth over the past 20 years.

SG&A expense decreased 4% to $49.2 million in the fourth quarter of FY14. That was down from $51 million in the fourth quarter of FY13. That decrease in the fourth quarter of FY14 is primarily attributed to the previously mentioned net impact of reductions in accrued contingent consideration, as well as impairment losses associated with a FY12 acquisition. And that partially offset by an increase in certain selling and personnel expenses to support a higher net sales volume.

SG&A expenses increased 4% to $194.9 million in FY14, up from $187.6 million in FY13. The increase in FY14 principally reflects an increase in cost to support higher net sales volumes and that was partially offset by the previously mentioned net impact of reductions in accrued contingent consideration and impairment losses associated with the FY13 acquisition as well as a FY12 acquisition. SG&A expenses as a percentage of net sales were 16.8% and 17.2% in the fourth quarter and full FY14, and that compared to 17.8% and 18.6% in the fourth quarter and full FY13. The decrease in both the fourth quarter and full FY14 principally reflects the previously mentioned net impact of fair value adjustments to accrued contingent consideration, as well as intangible asset impairment losses.

Interest expense in the fourth quarter and full FY14 was $1.3 million and $5.4 million. That was up from $1.2 million and $3.7 million in the fourth quarter and full FY13. Those increases principally reflect a higher weighted average balance outstanding under our revolving credit facility and that associated with FY13 acquisitions as well as the acquisition of certain noncontrolling interest during FY14.

Other income in the fourth quarter in FY14 was not significant, so I won't comment on it. Our effective tax rate in the fourth quarter of FY14 decreased to 31.3% from 34.7% in the fourth quarter of FY13. And it decreased to 30.1% in FY14, down from 31.1% in FY13.

That decrease in effective tax rate for the full FY14 is principally attributed to the impact of a nontaxable reduction in previously mentioned accrued contingent consideration associated with a FY13 acquisition. And that was partially offset by lower US federal R&D tax credits recognized in FY14, and that was due to the expiration of the US federal R&D tax credit in December 2013, and higher tax exempt unrealized gains in the cash surrender value of life insurance policies related to the HEICO corporate leadership comp plan in 2013.

Our effective tax rate and noncontrolling interest rate expressed as a percentage of pretax income was approximately 39% for FY14. For those of you on the call who want to dig deeper into that complex explanation of taxes, you're all welcome to get in touch with Carlos or Tom after the call, and they will walk you through it.

Net income attributable to noncontrolling interest was $4 million and $17.5 million in the fourth quarter and FY14, respectively. That compared to $6 million and $22.2 million in the fourth quarter and FY13. The decrease in net income attributable to noncontrolling interest in the fourth quarter and FY14 principally reflects lower allocations of net income to noncontrolling interest due to the acquisition of certain noncontrolling interest during the current year.

Moving on to the balance sheet and cash flow. Cash flow provided by operating activities increased by 45% to a record $190.7 million in FY14, up from $131.8 million in FY13. The increase principally reflects efficient management of working capital by HEICO team members, as well as increases in earnings, and the impact of certain non-cash adjustments. Working capital ratio has remained strong at 2.8 as of October 31, 2014, slightly up from 2.7 on October 31, 2013.

Days sales outstanding of accounts receivable was 47 days as of October 31, 2014, that was down from 50 days as of October 31, 2013. We closely monitor all receivable collection efforts in order to limit credit exposure and as you know, HEICO has had very few accounts receivable credit losses over the years. No one customer accounted for more than 10% of net sales, and our top five customers represented approximately 17% of consolidated net sales in FY14, and that compared to 15% in FY13.

Our inventory turnover rate improved to 106 days as of October 31, 2014, that was down from 111 days in October 31, 2013. Again, reflecting diligent efforts made by subsidiaries to prudently manage inventory levels. Net debt to shareholders equity as I mentioned before was 40% on October 31, 2014. With net debt of 300 -- that's total debt less cash and cash equivalents of $308.9 million, principally incurred to fund acquisitions, as well as the payment of special cash dividends in FY13 and FY14. Our net debt to EBITDA ratio again was 1.23% -- I'm sorry, times, as of October 31, 2014 and that compared to 1.64 as of October 31, 2013.

The banks particularly and credit investors and management, watch that EBITDA ratio very carefully and as you all know, it's extremely low for a Company that has grown the way HEICO has. The reason for it is that we generate a lot of cash and we borrow and pay down the debt very quickly. We have no significant debt maturities until FY19, and we plan to utilize our financial flexibility and strength to aggressively pursue high quality acquisition opportunities to accelerate growth and maximize shareholder returns.

As we look ahead to FY15, we anticipate continued growth within Flight Support and their aftermarket replacement parts and repair and overhaul services, product lines, partially offset by declines in demand for certain of our industrial products within our specialty lines. Furthermore, we anticipate improved demand and moderate levels of growth within ETG as compared to FY14. During FY15 we will continue to focus on developing new products and services. We will focus on market penetration, additional high quality acquisition opportunities and maintaining our financial strength.

Based on current economic visibility, we are estimating year-over-year growth in both net sales and net income of approximately 8% to 10% over FY14 levels, with consolidated operating margins approximating 18%. Additionally, we anticipate depreciation and amortization expense of approximately $48 million, CapEx to approximate $25 million, cash flow from operations approximate $200 million, and a combined effective tax rate and noncontrolling interest rate expressed as a percentage of pretax income to approximate 39%.

The aforementioned growth is expected to be primarily organic, but includes the estimated contribution from a small acquisition which we expect to close in the near future. Also, these numbers do not reflect any impact which we may have because increased business from lower gas prices.

As investors have come to know and expect, HEICO does prefer to issue conservative full-year guidance estimates in December, and this is based upon input from our business unit leaders in the field. It's a bottoms up projection. If and when business events become clearer as the year progresses, we typically in past years have revised our estimates upward.

As an example, our net income estimate for fiscal year ending October 31, 2014, which we issued in December 2013, projected growth of 8% to 10%. Final net income in the FY14 resulted in year-over-year growth of 18%. And we hope that we will be able to do the same as FY15 progresses.

In closing, I want to thank HEICO team members. While FY14 was a challenging year, given overall economic conditions, through the efforts of these great team members we were able to attain organic growth of 13% in aerospace, and 12% of organic growth in the space markets. It's through their dedication and efforts that we have achieved our significant 24 year compound annual growth of 17% in net sales,19% in net income and 21% in our stock price.

One comment I want to make because I'm sure that the questions that follow will focus on acquisitions. I can tell you we have a relatively strong pipeline of acquisitions. Acquisitions are very difficult because of pricing and low interest rate. We have a lot of competition from private equity and others. We do extensive due diligence internally. We don't farm it out.

Based upon the backlog that we do have, I would expect that we will make a normal number of acquisitions, hopefully in the relatively near future. I can't guarantee it, because you never know if an acquisition closes until it's done. So we have been working diligently. In one case for over a year and-a-half on one very complex acquisition and we think that we're doing a strong job in focusing on the acquisition side of the program. So with that, I have covered all my prepared comments, our prepared comments, and I would like to open the floor for questions.

Thank you.

(Operator Instructions)

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

Good morning, guys.

Good morning, JB.

Maybe, Victor, could you go through the submarkets in ETG, and talk about where there's any strengths or weakness? Looks like organic was a little low for the quarter, which is probably driven by military. Could you maybe talk about the other markets there and what you're seeing?

Yes, JB. This is Victor. I think you hit the nail on the head in terms of kind of a larger market for us, or one of our larger markets in ETG, being soft in the quarter, and the year in particular. And the strength I think for us that we saw throughout the year was really on the space side, and that's really commercial space. We generally put defense space into defense. Our commercial aviation businesses were strong as well. So, those were pretty good.

In the fourth quarter, I think a number of markets were also weaker. I think we saw that in our general markets, as well as actually in aerospace. But I wouldn't get too caught up on the quarters, as you've heard me say before, as a rule of thumb. We can have weakness, or apparent weakness, in a very short period of time, and then all of a sudden you see it snap back in the following quarter. And that could be because orders are delayed, or we have a technical issue that's pushed something into the next quarter, or it's just a normal shipment cycle and we expected the quarter to be weaker. So, generally, I would look over the full course of the year.

Okay. And then, the reversal there, if my math is correct, 2.5 points of margin benefit in the quarter, roughly?

I'm going to let Carlos address that accounting.

This is Carlos Macau. The reversal, particularly for the quarter, if you look at it, it had a net bump to the quarter of a little bit over $2 million for the -- related to the fourth quarter. For the full fiscal year, it was kind of a wash when you take into consideration the contingent earn-outs, the impairments, the incremental shortfall in earnings, and the incremental amortization charges that we didn't have to take as a result of the write-off -- it kind of was a push. So, that's the answer to that question.

Okay. And then, Larry, I noticed your net income and revenue guidance, the 8% to 10%, but it looks like your cash flow guidance is only up about 5%. Is there anything in there that we should -- cash flow from operations up about 5%. Is there anything in there we should be aware of? Is it working capital needs greater next year than normal or --?

No, I think it's probably our general tendency towards conservatism. We really don't know. We'd rather focus on the lower side. As you know, we move these things up. I can't guarantee we will, but it's just an early part of the year guesstimate.

Remember, and you know this, that we're only through really one month, November, into our fiscal year. We're not even done with December. So, I think it's just a conservative guesstimate, and obviously we would hope to do better than that.

And then, could the same be said for the CapEx guidance of $25 million versus $16 million this year? I think in the past you've kind of said: Look, this is sort of a wish list, and not all of it may get spent. Is that how you're looking at the --?

That's exactly correct. You have it 100% correct.

Okay. All right. Thank you, guys.

Thank you.

Our next question comes from the line of Tyler Hojo of Sidoti & Company.

Good morning. So, just I guess a first question for the flight support group. I guess this isn't the first time we've heard that specialty products is a headwind. But I'm wondering if you can maybe give us a little bit of additional detail in regard to what the growth rate might have looked like for commercial aftermarket if you excluded specialty products, and also if you could maybe remind us just how big of a piece of the segment is that today?

Hi, Tyler, this is Eric. Again, just as a little bit of background, the specialty products group is highly successful. It does a lot of aerospace, as well as has some industrial product sales, as well as some defense sales. And basically, the headwind that we faced in the fourth quarter and that we will face next year is that we completed a contract, which was a multi-year contract. It was fairly large. And we completed it according to the terms of the contract.

And the underlying product that we sold is not going to be required any longer. It's not like we lost the business. It's just not going to be required because, as it actually turns out, the application did not run as hot as the original manufacturer thought that it would. So, we think that it is a unique situation, and it does -- we don't anticipate any knock-on effects to any other businesses or any other products that that business sells.

In addition, there was a delay in receiving basically certain products for the foreign military markets. We have, in fact, received those contracts, so that impacted us in the fourth quarter as well.

As far as percentage sales increases, again, commercial aerospace is the vast majority of our flight support group, and that business remains quite strong. In terms of percentages, just so I make sure that I get them all -- so, consolidated aerospace sales were up 13%, on a consolidated basis; and really, the only headwind was in this basically specialty products area.

Got it. Okay. And maybe just in terms of the end market mix -- I think you guys usually provide that. I guess you said commercial aviation's up 13% or so. How about -- what percentage of sales was defense and space and other?

Well, the defense market was about 17% for the full fiscal year for the Company on a consolidated basis.

Okay.

Space was slightly under 10%.

Say that again, I'm sorry, Carlos.

Space was slightly under 10%, on a combined basis.

Okay, got it. And maybe just another question: You mentioned several times through the prepared remarks that a benefit from older capacity coming back in isn't included in your guidance. I mean, if you had to guess, I know it's a tough question, but assuming oil remains in this range for the year, what do you think that growth could look like for the FSG segment?

That is, Tyler, a very, very good question, and it's very hard to figure out. It really depends what the airlines want to do with their retirement plans. They had planned on retiring certain aircraft. The retirements of those aircraft are embedded in our forecast. If they, in fact, delay the retirement to the aircraft because demand for passenger seat miles remains strong, and they, in fact, decide to keep those aircraft in service, then that will help us.

It is really too hard to quantify, especially at this point. Oil has really made its move in the last couple of weeks in particular. Nobody expects it to rebound any time soon. It's just a complex equation, and something that we really were not able to bake into our forecast. So, I would say that it's just too early to tell.

To the extent perhaps also that airlines reduce some of the fuel surcharges and reduce prices, maybe that will also help stimulate the demand, as consumers have more money to spend, as businesses, non-oil patch, oil-related businesses have more money to spend as well, and that could help. Honestly, it is -- I couldn't even guess at this point as to what it is.

We know that it -- we believe it can only help. It will not hurt us. It can only help. The only question is to what extent. And maybe we'll have some more color on that in our first-quarter conference call, which should be at the end of February 2015. But until then, it really is too hard to figure out.

Understood. Well, had to ask. Okay. Thanks so much.

Thank you.

Our next question comes from the line of Michael Ciarmoli of KeyBanc Capital Management.

Good morning, guys. Thanks for taking my questions.

Good morning.

Maybe, Carlos or Tom, I guess, just -- I think you guys said SG&A spending was up a bit. If I look out to next year, it doesn't appear like you're getting a lot of leverage -- operating leverage --on the sales growth in your businesses. Is there anything you guys are looking at? I guess margin's expected to be flat next year. Are you guys looking at any kind of cost cutting or any kind of initiatives to maybe unlock some margin expansion? Or should we be thinking as you guys are kind of running at maybe the highest capacity you can with these margins? Just looking for some color on maybe what kind of expansion potential's in the margins.

Hi, Michael, it's Eric. I'll go ahead and start out, and then Carlos will finish. But with regard to the FSG, the flight support group segment, we've always said that margins run in really that sort of 17% to 19%, and they bounce around. When we had the impact as a result of the specialty products drop in the industrial sales, as well as some of the defense-related sales, we had some excess, basically, operating costs embedded in those businesses. And we weren't able to, if you will, fully absorb them as we normally would do.

Within the commercial aerospace, we were quite strong; and we believe that we've got an incredible team, and that's why we're able, as a team, to deliver these results, and we make sure that people are rewarded accordingly. So, I would say nothing has changed in terms of our guidance that the margins will pop around in the, if you will, 17% to 19% area, and sometimes it's a little higher, sometimes it's a little lower. Carlos can add some specific color to the percentages.

I would agree with what Eric just said, and I think that it's early to tell right now; in our preliminary forecast, we've assumed stable margins. If we are able to do better, which we hope to, we might see a slight improvement in our OI margin. But that's yet to come. It's too early in the year to make that prediction.

And also, just a comment: One of the areas that, of course, reduces the reported margin is the amortization of intangibles. And that continues until some of these acquisitions are worked off. That continues to be a fairly significant number. If you look at our EBITDA margin, and Carlos can comment on what that is, I think our EBITDA margin is quite good.

It is. I think we run in the FSG around 21%; and in ETG, 29%, 30% on EBITDA margin. So, those are strong. Cash generation for the Company in both segments is very strong.

When you take off these, if you will, those incremental sales, that is what drives the slightly lower margin for the period.

Got it. And then maybe just to go back, Eric, to Tyler's line of questioning, as maybe airlines keep some of the older planes in demand, can you comment on what you're seeing in the surplus parts market out there? I would think that market would potentially soften up, and how you guys are just viewing the trends there and contemplating that. And it might be hard to tell. You guys said it was very hard to tell what the airline behavior is, but maybe just current activity in the surplus parts market?

From what we've seen, and, of course, we participate in a relatively small way in the surplus parts market, but 2014 was much tougher than 2015, in essence, in order to be able to buy some of the assets. It looks like the market definitely tightened up in 2014. I would assume, with fuel prices lower, they're going to make sure that they get as much life out of the older equipment as possible. So, that probably will make the surplus market a little bit tighter than it's been in the past. But we're really going to have to see what that comes out to be. There's no question: Low fuel prices can't be good for the surplus market.

Right, right.

By the way, I should also add, in one of the lines of thinking, and we're really trying to get our arms around this, nobody is anticipating significant cancellations of new equipment. But, of course, if, and this is only speculation, if OEMs come under pressure, a little bit of pressure on new equipment where they've already committed to certain costs, they, of course, need to be able to make up those -- that shortfall elsewhere. And obviously, the lever that we know that the OEMs always have is spare parts pricing.

So, it could be very interesting if lower oil prices cause some, if you will, incremental deferrals or cancellations, and that, in fact, drives some higher OEM spare parts pricing. And that, of course, would be very good for HEICO. Would not be so good for the airlines, but the airlines are used to this.

Got it. And maybe just the last one I've got, for Victor. Are all of the challenges behind Lucix at this point? Are you guys comfortable with this business going forward, and just maybe just a general update. I know they've had some challenges and new start and rework on those satellite programs. Is this all in the rear-view mirror?

I think it's definitely much better than it was. You may recall on the last call I said I thought that we would work through these and see improvement as FY15, in fact, wore on, that it wouldn't be sort of totally clear sailing. I don't think we're yet at totally clear sailing, but it is much improved. They did get some pretty big orders toward the end of last year, and that's helped them out in the backlog. And on the technical side, I think they're doing much better. Again, unfortunately not totally out of the woods yet, but I think nice improvement.

Are all of these earn-out reversals done for you guys? You did the impairment charge. Should we expect any more noise to flow through the P&L?

I'll let Carlos answer that.

Yes, Michael, all the impairment charges -- I guess all the contingent earn-out reversals relative to the 2012 and 2013 acquisitions have principally been taken. We have a small amount left on the books for a 2013 acquisition, but that's around $1 million. We'll see how that plays out.

All right. Sounds good. Thanks a lot, guys.

Thank you.

Our next question comes from the line of Steve Levenson.

Good morning, everybody.

Good morning.

I appreciate the discussion you did on oil prices and airplane retirements. I know there are other factors, like environmental or metal fatigue or increasing MRO expense. What other things do you think go into the decision? And is there a particular -- is it based on age or the number of cycles or the number of hours? I know it's a complicated exercise to figure that out, but we've been getting a lot of questions and I thought you might help us out. Thanks.

Those are very good questions. We believe that the existing fleet that's out there does not have a problem with age. The way airlines typically schedule retirements of aircraft is they take the aircraft that are due for heavy maintenance or large expenditures, and those are the ones that get retired first, unless there are return requirements and they go back to the lessors. But basically, if you see -- the value of the older equipment has come down so much; newer equipment is still fairly expensive, but with interest rates lower, that was stimulating the purchase of newer equipment, which, in fact, does have lower emissions, and there is a certain maintenance honeymoon with the newer equipment.

However, with the older equipment, there's basically no incremental depreciation. They're fully depreciated. Interest rates for the short term are very low; so, whether you have new equipment or old equipment, it remains low. To the extent that airlines think interest rates are going to tick up, that could impact the commitment to buy new equipment. Yes, there are the emissions issues, but basically the equipment that's flying today, there are no -- to my knowledge, there's no major driver in terms of noise or pollution that's causing the retirement of these aircraft. It was just strictly an economic issue, whereby the newer equipment is a little bit more fuel efficient, so they were able to save a lot of money on expensive fuel, and they were able to get a bit of a maintenance holiday.

But clearly, airlines such as Delta that have employed a strategy to use sort of mid-generation equipment, I think that's going to turn out to be a very wise approach. They're not going to end up having the depreciation on the equipment that certain other carriers will have.

So, again, it's a very complex equation. We think that it can only be good for us. Yes, the OEMs need to be careful to not, if you will, kill the goose that lays the golden egg by jacking up spare prices so much that they're able to extort back all the benefit from fuel in spare parts prices. I think they're too smart then to do that. There's probably some opportunity that they've got to try to recapture some margin here. So, we're just going to sort of see how it plays out.

Okay. Thanks. Second part of that question is: We've done a little calculation of our own, and I'm trying to do a sanity test here. Looks like maybe 40% of the narrow body fleet has not yet come in for its first major overhaul. Do you think that's a reasonable number or do you think we're too low, too high?

That's a very good question. We don't do our own independent analysis on that. I've read numbers all over the place. That 40% is, in general, consistent with a lot of the stuff that I've seen. Of course, that percentage may go down if older equipment stays out longer. So, I think it's very hard to figure out.

The way that we operate is we do budgets by business unit, by customer, by product type. So, they're very much, if you will, fairly conservative bottoms-up analyses, and we really don't do broader general macro kind of things because -- kind of projections -- because they become very theoretical, and we've got our very specific drivers that the business heads and our folks are looking to achieve. And when it starts getting, if you will, very theoretical, there's a little too much gap between that and what really happens.

So, we'll go out to the airline. We'll understand specifically what a specific airline intends on doing, and that's what drives our numbers. So, unfortunately, I can't really -- I wish I could help you out on that, but the truth is I really don't know, but the 40% sounds like it's in the general ballpark; maybe it's 30%, maybe it's 45%. I don't know. But it's in that general area.

Thanks very much for the additional detail. Appreciate it.

Thank you.

Our next question comes from the line of Ken Herbert of Canaccord Genuity.

Good morning, guys. It's actually Jonathan on for Ken.

Okay. Good morning.

Just to switch gears, you guys mentioned that a few small acquisitions were closing in the short term. How do you see opportunities in the long term? And is an accelerated buyback on the table?

This is Eric. As far as the acquisitions go, the one thing that we continue to see in the market is that HEICO is a preferred acquirer. We pay fair prices. But most importantly, we treat the employees, to whom we refer to as team members -- we treat the team members very well, and we treat the customers very well.

And when a company comes in to the HEICO family, we're really looking to continue that entrepreneurial spirit, and make sure that those processes and that feeling that help drive the Company and help get it successful remains. And we've got a long culture of doing this. We've bought roughly 50 companies, roughly, I don't know, 35 of them are still separate stand-alone businesses according to the original game plan, and we've got an incredible roster of former sellers who have worked with us and who know firsthand that this is not a line of crap, but it's for real.

Now, having said that, with interest rates very low, and private equity folks trying to put the money out, because the only way they can get the upside and generate the fees is to get the money out, sometimes they've been paying what we think are very high prices. And that, in our opinion, is not going to work out well to the team members, to the employees of those businesses, nor to the customers. We definitely have become a bit more aggressive pricing-wise than we've had to in the past because of this phenomenon, but we're not going to step over the edge. And so, the trick for HEICO is to find people who want to join the family, who appreciate those intangibles that, frankly, they can't find elsewhere.

So, we've got a number of deals teed up right now. You never know if they're going to close. There's all sorts of issues going on, and businesses going up and businesses going down and all of that. But I would say that we're cautiously optimistic.

We work very, very hard, and we hope that there are going to be some good announcements coming in the not too distant future. But again, I don't want to overpromise because it's binary; either it happens or it doesn't. You can't say: Well, we got almost to the finish line and it didn't work. But I'm cautiously optimistic, and I can tell you right now our deal book is much bigger than our capacity to process everything right now.

Okay, and is an accelerated buyback on the table at all?

An accelerated buyback -- are you talking about stock buyback?

Yes.

No. And just to explain that further, we want to grow HEICO, and buybacks shrink the Company. So, we feel that we would rather spend hundreds of thousands or millions expanding, buying additional company, adding cash flow and growth, than shrinking the Company. So, we're not in a shrink mode.

Got it. And then, just to bounce back quickly to commercial aftermarket. Are you seeing any additional pricing pressure from airlines? And do you see that evolving at all?

Actually, we don't. Look, airlines are always very price-conscious. You might think that even though we offer them terrific savings in everything that we do, that they don't push us on price. No, they've got great purchasing people who are well skilled in the art, and so they're always pushing price. But I wouldn't say that that's a major focus at this point.

Got it. Okay. Great. Thank you, guys.

Thank you.

Our next question comes from the line of Sheila Kahyaoglu of Jefferies.

Good morning. Thanks for taking my question. I guess just one quick one for Eric. What sort of flight hour growth are you embedding in your guidance for next year?

And you've mentioned new products several times over the last few quarters. Can you give us an idea of where you're spending your focus a bit more?

Hi, Sheila. The flight hour growth for us is very hard to determine because, again, when we do our budgets we go out to the customer, we go by customer and we go by platform and try to figure out the quantity of units, whether it's engines or components or air frames that they're going to be overhauling and what our content is going to be on it. So the stuff that I read in terms of flight hour growth I think is around that 5%, 6% area. But that really is coming -- I'm sort of circling back and giving you back what you guys write. I think you guys are very knowledgeable about that particular area. But it sounds in general consistent with the kind of stuff that we're seeing.

In terms of new products, we did very well this year. We continue to develop similar number of both PMAs and DER repairs that we have historically for the last 5, 6, 7 years. They are very, very well received. Our folks are doing a great job getting out there, finding out what the customers want and supplying it to them. So the pipeline is very full for us at the moment.

Thanks. I'll jump back in the queue.

Thank you.

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

Hi, good morning. Many of the questions --

good morning, Arnie.

I want to try to drill down a little bit more. You mentioned the operating -- someone had asked seven or eight questions ago about operating margin. I want to focus on that one more second. Last year's operating margin was impacted negatively by a number of unusual items or headwinds, and yet your overall margin guidance for the upcoming year is essentially flat. Obviously, the industrial products was a higher operating margin area and you mentioned why that won't be there in 2015. But shouldn't we have some other offsets and some operating leverage in the business that should get you a much higher margin? What other factors are holding it back that we should be thinking about?

Arnie, this is Carlos Macau. I think that as I said earlier, if our sales come out in the low end of our guidance, we believe that our operating margins will be consistent with prior year. We do anticipate that if our sales growth goes up to the higher end of our guidance, that there will be some opportunities for some margin expansion but I wouldn't call it a margin play if that's what you're after. I would say there would be some leverage we could get but I wouldn't focus on it being a large margin play. As far as last year goes, I don't recall there being a whole lot of noise if you would in our operating margin.

Arnie, this is Eric. On the, specifically with respects to the industrial product, we've got a great team focused on these industrial products. We're still very, very much committed to them. And we're maintaining that infrastructure and therefore, if you will, that excess capacity at the moment which costs money. Because we need these people to be able to handle the business when we find other products to take its place. It's not going -- we're not going to end up, we don't anticipate making the same particular product that we made where we finished the contract. But we think that there are a lot more opportunities.

The last thing that we want to do is to shed capacity, shed people, and not be able to respond immediately for this. We're the number one supplier in that area. The amount of time that it takes for us to take a concept into a finished part with full rate production, with all this automated equipment and highly skilled people that we've got is I think world class easily, probably the best in the world. And we would rather suffer through, if you will, lower incremental margins and have the ability to respond quickly to our customers so when they need the stuff we'll be back up online for them.

What percent of the segment sales are industrial products?

On a combined basis, other industrial --

I think what we say is that commercial aerospace is the vast majority of the business and we don't break out between industrial and defense for competitive reasons. But the commercial is probably in the 80% -- roughly 80% area.

And in previously in earlier in the call you mentioned a sort of normalized 17% to 19% operating margin in FSG. In the past ETG operating margin has been higher. How should we think about that in 2015 on a -- how should we look at it in 2015?

Your question is with respect to ETG or --

ETG operating margin.

I think we're expecting comparable to 2014, Arnie. This is Victor.

2014.

2014, Yes.

Thank you very much.

Thank you, Arnie.

Our next question comes from the line of Dan Whalen of Topeka Capital Markets.

Great. Thank you. Most of my questions have been addressed. But given we're at year end, can you comment a little further just in terms of how many new PMA certifications there were?

Yes, the PMA certifications approximated prior years in the 400 area and the same with the DER approvals are in a similar area as well. All together would be about 800.

Perfect. Thank you.

Thank you.

Our next question comes from the line of Michael Derchin of CRT Capital Group.

Hi. Historically organic sales growth has accounted for about 70% of your sales and bolt-on acquisitions about 30%. I guess in the last year that reversed a bit, more coming from acquisitions. I'm wondering if looking longer term like over the next five years would like 70%-30% split be an appropriate way to look at where your sales are coming from?

Michael, this is Carlos Macau. Historically, our slate has been more along the 60%/40% line, if you go back a number of years, and we would expect to follow that same pattern. Keep in mind, 2014 was as we mentioned previously challenging because the sellers' expectations and multiples went through the roof and we're very disciplined in our acquisition strategy, so we didn't see a lot of acquisition activity this year. We do expect going forward that when you look at our split of growth, that it would be the 60%/40% or 50%/50% type split between organic and acquisition growth.

Great. Thank you very much.

You're welcome.

Our next question comes from the line of Jim Foung of Gabelli & Company.

Hi. Good morning.

Good morning, Jim.

Good morning. Just want to follow up on the acquisition questioning here. You mentioned that you've kind of -- you're teed up for a number of acquisitions this year. I was just curious if they will unfold in 2015, how big could they be all together, if you were successful in closing all these?

Let me -- Jim, this is Carlos Macau. We can't predict the closure of the acquisitions. As Eric mentioned earlier, we have a full plate. I would say from my perspective as CFO, my team has been deployed all over the place, looking at deals, doing due diligence but we're in various stages of that process.

As Larry mentioned earlier, we have one that we expect will close in the near term, a smaller deal, but we are very active in the space and depending on the economics, the transactions and how we're able to close them, who knows. So we will continue as part of our historical strategy of growth through acquisitions to implement that strategy. But at this point we can't predict what will close and what will not. And what percent of our growth next year will come from that.

Right. I understand timing of that's uncertain and some of these may not even come to fruition. But I was just wondering if you could just kind of bracket or put a fence around how big this could be, if it all happened.

Jim, this is Larry. It's very hard to say because some transactions are in early stage. They could be relatively larger. Some of them are -- that are close, and this is all relative, but we don't want to give a number because if one happens and the other doesn't, those numbers would switch around. If a bigger one happens it will be more than we tell you and if it's a smaller one, the world would be disappointed.

And the truth is, we really don't know. As you know, until it's closed, it's still hanging fire and deals blow up at the last minute. So we'd rather say that we are looking at a number of transactions. They would be accretive, as usual. But as to the size, we really would -- we don't know. And we can't handicap what's going to close and what won't.

Okay. Fair enough. And then on ETG, Victor, in terms of your outlook towards defense, defense business this year in 2015, are you pretty comfortable that you have a good position and you might see stability in 2015 on your defense products?

By the way, our defense business, Jim, is not doing poorly in any way. In relative terms it's off a little bit but I'm still very proud of how the companies have done and very glad we own our defense businesses. I really don't know where the defense budget's going to be. My best guess is that somewhere toward the end of calendar 2015 or into 2016 that we start to see defense trends more positive and that we don't through the bulk of 2015. That's the assumptions we built into our budgets. Most of our defense companies have built in a harder year in FY15 than FY14.

And that's good for us to do. Because when we do that, we're conservative on our spending and the way we run the business and if we've got some good surprise there -- and I know there are a lot of people out there, lately I've seen a number of analyst reports saying they think the defense budget is going to start turning very soon and in fact see signs where there's going to be plus ups and things that are very positive and if that happens, that's great. Then we can add it in later. I think you know us well enough that we're going to plan conservatively and hope for better but keep the businesses running as well as possible. Of course, longer term I think as we get out, the businesses are still very well placed and we've got really good business in there. So we're very happy with it.

Okay. Great. That's all I have, then. Have a great holiday everyone and a happy new year.

Thank you, and you too, Jim.

And that was our final question. I'll now turn the floor back over to management for any additional or closing remarks.

The only thing closing remark is we thank you all for your interest in HEICO. We remain available to you, anyone of us, for questions that you may have. You know where to reach us. And we wish you a very happy Christmas holiday and new year and we look forward to speaking to you in the middle of February, when we come out with our next first quarter 2015 results. So have a good day and a good season. Bye-bye.

Thank you. This concludes today's call. You may now disconnect.