HEICO Corp (HEI.A) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to HEICO Corporation's FY15 third-quarter earnings results conference call.

(Operator Instructions)

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 those 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 or product specification costs and requirements which could cause an increase to our cost to complete contracts. Governmental and regulatory demands, export policies and restrictions, reductions in defense, base 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 risk, interest, foreign currency exchange in income tax rates and economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industries which could negatively impact our costs and revenues 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-A. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except to the extent required by applicable law.

Thank you. I would now like to turn the call over to Laurans Mendelson, HEICO's Chairman and CEO.

Thank you and good morning to everyone on the call. We thank you for joining us and we welcome you to this HEICO third-quarter FY15 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation. 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 VP and CFO.

Now before reviewing our third-quarter operating results in detail, I'd like to take a few moments to summarize the highlights of another record-setting quarter. I want to thank our HEICO team members for their collective efforts, outstanding execution during the third quarter, and by remaining focused on income generation, cash flow and profit margin strength. As I have said before, our mission is not just to grow sales to make a larger company, but to generate income and strong cash flow for all shareholders. The record third-quarter results I will now discuss are a testament to that strategy.

Our consolidated net sales, operating income and net income in the third quarter of FY15 represent record quarterly results and they were driven principally by record quarterly net sales and operating income in flight support and increased profitability in ETG. Consolidated net sales, operating income and net income in the first nine months of FY15 represent all-time record results for HEICO and they were driven principally by record net sales and operating income within both segments. Consolidated operating income increased 17% to a record $58.5 million in the third quarter of FY15 and that was up from $50.1 million in the third quarter of FY14 and increased 7% to a record $160.7 million in the first nine months of FY15 and that was up from $149.7 million in the first nine months of FY14. Consolidated net income increased 3% to a record $34.4 million in the third quarter of FY15 and that was up from $33.4 million in the third quarter of FY14. It also increased 7% to a record $95.1 million in the first nine months of FY15 and that was up from $89.2 million in the first nine months of FY14.

Consolidated net income per diluted share increased 4% to $0.51 in the third quarter of FY15, up from $0.49 in the third quarter of FY14. Consolidated net income per diluted share in the third quarter of FY14 included a net $0.05 per diluted share benefit from a reduction in accrued contingent consideration related to a prior-year acquisition. Consolidated net income per diluted share increased 6% to $1.40 in the first nine months of FY15 and that was up from $1.32 in the first nine months of FY14. Consolidated net income per diluted share in the first nine months of FY14 included a net $0.10 per diluted share benefit from a reduction in accrued contingent consideration related to a prior-year acquisition. Just a comment, later on in the Q&A, I'm sure Carlos and Tom will be happy to discuss the impact of those reductions in accrued contingent consideration.

Cash flow from operating activities remained strong in the third quarter of FY15, totaled $56.5 million or 164% of our consolidated net income. Very strong, I may add. Cash flow provided by operating activities in the first nine months of FY15 totaled $121.3 million or 128% of consolidated net income. In July 2015 we paid our 74th consecutive semiannual cash dividend since 1979 and that was paid at a rate of $0.07 per share. As of July 31, 2015 we remain extremely well-positioned for growth as a result of our financial flexibility. The Company's net debt to shareholders equity ratio was only 31%, with net debt of $267.8 million.

In June 2015 we reported that our Dukane Seacom subsidiary had created the first FAA and EASA certified ninety-day underwater beacon. We are pleased to note that they have now established the new operational standard in underwater locator beacon technology. With over 40 years of industry experience, Dukane Seacom has the largest installed base of underwater locator beacons on commercial, military and business jets around the world.

In July 2015, we reported that our 3D Plus and VPT subsidiaries supplied mission-critical components for NASA's New Horizons spacecraft which has traveled farther and faster than any prior space mission in history. We are consistently amazed by the engineering talent and forward thinking of our team members who supported NASA in this historic flight past Pluto and beyond. 3D Plus, VPT and certain other HEICO subsidiaries have routinely supplied critical components on NASA and the European space agency programs and many of HEICO's subsidiaries are well-known leaders in complex, high reliability, mission-critical engineering and manufacturing for spacecraft. We want to congratulate our teams at 3D Plus, VPT and Dukane Seacom on these wonderful tremendous accomplishments.

As I reported in our last conference call, the acquisition pipeline has been very active and, as you know, we are pleased to report that we closed four transactions since the second quarter. In May 2015, our Flight Support Group completed the acquisition of Thermal Energy Products, which engineers, designs and manufactures removable and/or reusable insulation systems for industrial, commercial aerospace and defense applications and this is now part of HEICO's specialty products group.

In August 2015, our Flight Support Group acquired 80.1% of the equity of Aerospace & Commercial Technologies, we call it ACT, a leading provider of products and services necessary to maintain up-to-date F-16 aircraft operational capabilities. Aerospace & Commercial Technologies, ACT, will work in coordination with our Blue Aerospace subsidiary to support the F-16 community worldwide. The acquisition expands our reach into defense aftermarket support and broadens our existing base of business in this very important sector. In August 2015, our Flight Support Group also acquired all of the outstanding stock of Astroseal Products Manufacturing Corp., a manufacturer of expanded foil mesh which is integrated into composite aerospace structures for lightning strike protection in both fixed and rotary wing aircraft. This acquisition expands HEICO's capabilities and offerings of aerospace and composite parts.

And also in August 2015, our ETG group acquired 80.1% of the equity in Midwest Microwave Solutions, we refer to it as MMS, a designer and manufacturer of unique size, weight, power, and cost optimized communications and electronic intercept receivers and tuners for military and intelligence applications. This acquisition is a perfect fit for HEICO and expands our intelligence-gathering equipment business.

In June 2015 we were pleased to report that Forbes magazine had again named HEICO as one of the world's 100 most innovative growth companies. This makes 10 awards in 10 years. The recognition is a true testament to the expertise and innovative spirit of our more than 4,500 team members worldwide. And I express my deepest appreciation and admiration for their remarkable efforts and dedication to HEICO's success.

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

The Flight Support Group's net sales increased 8% to a record $206.6 million in the third quarter of FY15, up from $191.6 million in the third quarter of FY14 and increased 4% to a record $591.4 million in the first nine months of FY15, up from $568 million in the first nine months of FY14. The increase in the third quarter and first nine months of FY15 mainly reflects net sales contributed by the FY15 acquisitions as well as additional net sales from new product offerings in our aftermarket replacement parts and repair and overhaul services product lines. These increases were partially offset by lower net sales of certain industrial products that we have discussed in prior conference calls. As a result of the lower net sales of certain industrial products, the Flight Support Group experienced a small 1% and 2% organic revenue decline in the third quarter and first nine months of FY15 respectively.

Excluding the impact of declines in certain industrial net sales, the Flight Support Group experienced organic growth of 4% and 3% in the third quarter and first nine months of FY15 respectively. Consistent with most of our peers, we experienced somewhat lower aftermarket industry growth in our third quarter and first nine months of 2015 as compared to expectations for higher industry growth going into this year. Based on current available seat miles, or ASMs, we believe that in our third quarter airlines avoided spending on maintenance costs where possible and ultimately will have to increase such spending if they continue to fly the aircraft that they are currently operating.

The Flight Support Group's operating income increased 15% to a record $39.3 million in the third quarter of FY15, up from $34.2 million in the third quarter of FY14 and increased 4% to a record $107.5 million in the first nine months of FY15, up from $103.3 million in the first nine months of FY14. The increase in third quarter and first nine months of FY15 is principally attributed to the previously mentioned net sales growth. The increase in the third quarter of FY15 also reflects the impact of foreign currency gains related to a euro-denominated contingent earnout liability and a lower accrued performance-based compensation expense, partially offset by a less favorable product mix from the previously mentioned decrease in net sales of certain industrial products.

The Flight Support Group's operating margin improved to 19% in the third quarter of FY15, up from 17.9% in the third quarter of FY14 and approximated 18.2% in both the first nine months of FY15 and FY14. The increase in operating income as a percentage of net sales in the third quarter of FY15 principally reflects the previously mentioned foreign currency gains in lower accrued performance-based compensation expense, partially offset by the less favorable product mix.

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

Eric, thank you. The Electronic Technologies Group's net sales decreased 5% to $97.2 million in the third quarter of FY15 from $102.1 million in the third quarter of FY14. The decrease principally reflects foreign currency exchange rate changes, as well as slightly lower demand for certain space and medical products, partially offset by higher demand for certain defense and other electronic products. The Electronic Technologies Group's net sales decreased 1% to $277.4 million in the first nine months of FY15 from $279.3 million in the first nine months of FY14. The decrease is mostly from lower net sales of certain space and other electronics products resulting mainly from foreign currency exchange rate changes, partially offset by higher demand for certain defense and aerospace products.

As for our principal markets, overall our defense businesses have strengthened and, as we discussed on last quarter's call, there is bipartisan support in Washington for increased defense spending in the next fiscal year, so we are cautiously optimistic that US defense budgets overall will grow. Our commercial space business has been a little bit softer, about half of which came from currency translation changes and half of which resulted from some parts of our businesses coming off excellent performance last year as well as earlier this year. Overall we are very pleased with our space businesses, but will wait to see if the industry is a little softer than it was. Notably, Lucix did well in the quarter and has continued to improve. The other ETG markets that we serve are seeing a slightly positive overall mix of conditions but there are pockets of weakness in some of the electronics markets that we serve.

The Electronic Technologies Group's operating income increased 14% to $24.4 million in the third quarter of FY15, up from $21.5 million in the third quarter of FY14. The increase principally reflects a more favorable product mix for certain space and defense products. The ETG Group's margins -- operating income increased 6% to a record $66 million in the first nine months of FY15, up from $62.5 million in the first nine months of FY14. The increase mainly reflects a more favorable product mix for certain space and defense products and lower amortization expense associated with intangible assets. The ETG Group's operating margin improved to 25.1% in the third quarter of FY15, up from 21% in the third quarter of FY14. The increase mainly reflects a more favorable product mix for certain space and defense products. The Electronic Technologies Group's operating margin improved to 23.8% in the first nine months of FY15, up from 22.4% in the first nine months of FY14. The increase mainly reflects a more favorable product mix for certain space and defense products and lower amortization expense associated with intangible assets.

At this point, I turn the call back over to Larry Mendelson.

Thank you, Victor and Eric. Commenting now on diluted earnings per share, consolidated net income per diluted share increased 4% to $0.51 in the third quarter FY15. That was up from $0.49 in the third quarter of 2014. Third quarter FY14 again included a net benefit of $0.05 per diluted share. That was mainly due to the reduction of accrued contingent earnout liabilities associated with a prior-year acquisition. Consolidated net income per diluted share increased 6% to $1.40 in the first nine months of FY15 and that was up from $1.32 in the first nine months of FY14. The first nine months of FY14 again included a net $0.10 per diluted share benefit mainly due to the reduction of accrued contingent earnout liabilities associated with that prior-year acquisition.

Depreciation and amortization expense was $11.9 million in the third quarter of 2015 comparable to the third quarter of 2014. Depreciation and amortization expense decreased to $35.1 million in the first nine months of FY15 and that was down from $36.3 million in the first nine months of FY14. That decrease mainly reflects lower amortization expense of certain intangible assets resulting from impairment losses recorded in FY14 partially offset by a higher amortization expense of intangible assets recognized in connection with some of our FY15 acquisitions.

Research and development expense totaled $9.4 million in the third quarter of FY15; that compared to $9.9 million in the third quarter of 2014. R&D expense totaled $28.9 million in the first nine months of FY15, compared to $28.3 million in the first nine months of FY14. Significant ongoing new-product development efforts are ongoing at both Flight Support and ETG as we continue to invest approximately 3% to 4% of each sales dollar into new product development. Our effective strategy for the last 24 years has been to reinvest a portion of our earnings into the development of new products and services that can offer lower costs and higher value to our customers and that in turn facilitates market share growth sufficient to meet our growth goals.

SG&A expense decreased to $49.6 million in the third quarter of FY15. That was down from $53.2 million in the third quarter of FY14. SG&A expense as a percentage of net sales decreased to 16.5% in the third quarter of FY15 and that was down from 18.3% in the third quarter of FY14. The decrease in SG&A expense as a percentage -- in expenses as a percentage of net sales in the third quarter of FY15 mainly reflects the impact of foreign currency gains and that was related to liabilities denominated in euros as well as lower accrued performance-based compensation expense. SG&A expenses totaled $146.7 million in the first nine months of FY15 and that was comparable to the $145.7 million in the first nine months of FY14. SG&A expense as a percentage of net sales decreased to 17.1% in the first nine months of FY15. That was down from 17.3% in the first nine months of FY14.

Interest expense decreased to $1.1 million in the third quarter of FY15 and that was down from $1.4 million in the third quarter of FY14. Interest expenses decreased to $3.3 million in the first nine months of FY15, again down from $4.2 million in the first nine months of FY14. The decrease in interest expense during the third quarter and first nine months of FY15 principally reflects a higher weighted average balance outstanding under our revolving credit facilities in the prior periods and that was associated with FY13 acquisitions and the acquisition of certain noncontrolling interest in FY14. Other income and expense was not significant; I won't comment on it.

Income tax. The effective tax rate in the third quarter FY15 increased to 32% from 23.4% in the third quarter of FY14. The lower tax rate experienced in the third quarter of 2014 was mainly attributed to a reduction of contingent earnout liabilities associated with a prior-year nontaxable stock acquisition. The reduction in contingent earnout liabilities during the third quarter of FY14 was nontaxable and accounted for approximately 7% of the change in the effective tax between the two periods. The effective tax rate in the first nine months of FY15 was 30.6%, comparable to 29.7% effective rate in the first nine months of FY14.

Net income attributable to non-controlling interest increased to $4.6 million in the third quarter of FY15; that was up from $4 million in the third quarter of FY14. The increase mainly reflects the impact of net income allocations to the FY15 acquisitions in which non-controlling interests are held. Net income attributable to non-controlling interest increased to $14.4 million in the first nine months of FY15; that was up from $13.5 million in the first nine months of FY14. The increase in the first nine months of FY15 again mainly reflects higher allocations of net income to certain subsidiaries of FSG and ETG in which non-controlling interests are held. On a combined basis, we estimate FY15's effective tax rate and non-controlling interest allocations will approximate 40% of consolidated pretax income in the full fiscal year.

Now moving on to the balance sheet and cash flow, as you can see, our financial position and forecasted cash flow remain extremely strong. Cash flow was strong in the third quarter of FY15 and cash flow provided by operating activities totaled $56.5 million and that was 164% of reported net income. Working capital ratio is a strong 3.2% as of July 31 and that was up from 2.8% as of October 31, 2014. DSOs or receivables was 46 days in the third quarter of FY15 and that was comparable to the 47 days in the third quarter of FY14. Of course, we continue to closely monitor all receivable collection efforts to limit our credit exposure. No one customer accounted for more than 10% of net sales and our top five customers represented approximately 18% and 17% in the third quarter of FY15 and FY14 respectively.

Inventory turnover rate in the first nine months of FY15 was 117 days compared to 111 days in the first nine months of 2014. The increase in our inventory turnover rate principally attributed to slightly higher inventory balances at our subsidiaries which we need to meet customer orders in the near-term. Net debt to shareholders equity ratio was 31.3% as of July 31, 2015, and net debt of $267.8 million principally incurred to fund acquisitions and the payment of the special cash dividends in FY14 and FY13. We have no significant debt maturities until FY19 and we plan to use our financial flexibility to aggressively pursue high-quality acquisition opportunities which should accelerate growth and maximize shareholder returns.

As for the outlook, we look ahead to the remainder of FY15 and we anticipate organic growth within our product lines that serve commercial aviation markets, moderated by lower demand for certain industrial-related products within our specialty products lines. Despite the currency headwinds impacting our foreign subsidiaries within the ETG Group, we continue to forecast full-year organic growth within ETG. During the remainder of FY15, we plan to continue to focus on new product development, further sales penetration into markets we serve, executing our acquisition strategies and continuing to maintain financial strength. Based upon current economic visibility, we estimate consolidated FY15 year-over-year growth in net sales to approximate 5% versus our prior estimate of 8% to 10%, and net income growth to approximate 8% which is within our prior estimate of 8% to 10%. We have raised our full-year fiscal consolidated operating margin estimate to approximate 18.5% versus our prior estimate of 18%. We also anticipate depreciation, amortization, CapEx, and cash flow from operations to approximate $48 million, $20 million and $200 million respectively.

While we have lowered our full-year revenue estimates in light of headwinds which we are experiencing as a result of slower industry growth in aerospace aftermarket, and Eric talked about that earlier, as well as the impact of foreign currency exchange rates, which Victor spoke about, we are pleased to maintain our net income growth estimates at approximately 8% for the full fiscal year and we have benefited from our focus on profit margin strength. Our FY15 acquisitions should position us for continued growth in FY16 and beyond. We expect those acquisitions to be accretive at least in the first year of the acquisition.

In closing, we will continue to focus on creating shareholder value through remaining focused on customers, strong cash flow, generating growth in net income and strong profit margins. And those are the extent of our prepared comments and we would like to open the floor for questions.

(Operator Instructions)

Larry Solow, CJS Securities.

Hi, this is actually Lee Jagoda for Larry. Good morning.

Good morning.

I know on the acquisition side, talking about individual acquisitions, purchase price and revenue contribution is sometimes difficult but given you have made three in the last few weeks, is there any way you can combine them and give us a ballpark range for both purchase price and revenue as the combined group of them?

Actually we didn't release that information and we don't release it, and at this point we really cannot give you that information. It has not been released to the public, but Carlos can comment a little more on it.

Baked into our guidance Larry just articulated, we knew about those acquisitions that we're closing that were factored into it. They are not material, otherwise we would have disclosed that information, but they are acquisitions that are very complementary to our existing product lines and expand our business and we think they are going to be very good for us, as Larry mentioned, going forward.

Okay, and then --

Part of the answer, which you guys will figure out, is when you see the cash flow statement and so forth, you are going to get a guesstimate from the cash flow statement that we produce, I guess in the fourth quarter. So it will give you a kind of figure. But as Carlos says, overall it was not that material.

And assuming at the end of the year that the 5% top-line growth is achieved, what are the components of that 5%? Meaning what is organic? What would acquisitions contribute? And then what is the negative from FX embedded in that 5%?

Right now year-to-date we have acquired growth on a consolidated basis of about $32 million. And so we expect similar run rate going through the end of the year from the acquired acquisitions that we have already purchased in the first quarter, maybe about $10 million a quarter. And then, as we just previously mentioned, we are not going to talk specifically about the financial operations for contributions of the acquired acquisitions because they are insignificant to the overall consolidated operations.

And what do you think the FX impact has been over the first three quarters and how should we think about that for Q4?

It's interesting. It's principally impacted the Electronic Technologies Group through some of our foreign subsidiaries that do business in euros and Canadian dollars. And so in the Electronic Technologies Group in particular, they had about a 5% revenue headwind comparatively between [Q3] last year and this year. About half of that was related to FX impacts on our revenue line. And I don't have a crystal ball as to what currencies are going to do right now, but we have been conservative in the way we thought about it going forward.

Okay. And then one more question and I will hop back in the queue. In terms of the better margin forecast, despite the lower sales, what are the key drivers of the 50 basis point increase?

The key drivers overall were, I think as both Eric and Victor mentioned in the presentation, we had a lower accrued performance-based compensation. We have also have a euro-denominated loan which we took out in Q1 to do the acquisition of Aeroworks, which had some positive FX benefits, which also contributed to it. And then finally some of the efficiencies that our subsidiary general managers have baked into their businesses through operating leaner over the past nine months has contributed principally to it.

Great. Thank you very much.

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

Hello, guys, good morning. Thanks for taking my call.

Good morning, J.B.

Eric, one of the other aftermarket levered players the other day talked a lot about retirements and how that's impacted growth in aftermarket. Maybe you could give us your thoughts on that and how that is impacting your business? Obviously you guys have multiple ways to grow, but it seems like the organic growth has been a little slow. But do you think that's having an impact in terms of the total aftermarket demand?

Well, I think it's a very good question and we been in a number of investor conferences over the last month or so and received a lot of these kinds of questions. I think in looking at it, as we entered the year the investors, and I would say the analyst community, were a little more bullish on the aftermarket performance than what turned out for most of the suppliers.

If you look at most of the suppliers, they have been reporting sort of comparable a little bit disappointing numbers with the exception of GE and Safran which I think had some initial provisioning related to some new aircraft engine types in their numbers. But the way we look at it is it's a fairly complex equation in that you've got the base fleet aging obviously one year per year and then the older aircraft dropping out at the backend and, of course, the new aircraft coming in at the front end.

The airlines have been flying the older aircraft beyond what everybody originally anticipated and I think that's one of the reasons why the ASMs are up. And if the airlines continue to fly these older aircraft, they are going to have to put some dollars into it. We had baked into -- when we build our budgets, we analyzed the fleet plans of our customers and we have that all put in there in the, if you will, the complex equation.

So, yes, I think the retirements are impacting it and what's going to be really a telling quarter will be in the fourth quarter when we find out whether the airlines are, in fact, going to go ahead and fly some of these older assets longer or whether they are going to pull them out as originally planned. That's a little unclear as of now.

But in any case, that probably wouldn't slow your pace of PMA development which is, I'm guessing (multiple speakers) --

That's correct. Our pace of the PMA development is not slowing whatsoever. And as a matter of fact, the airlines are very focused on how we can help them with their current fleet as well as with the fleet they will be taking deliveries of. There is no change to our business model whatsoever.

As a matter of fact, I've been getting a lot of questions recently -- I don't want to go into specifically which aircraft type or which engines, but I've been getting a lot of questions from senior airline executives about what we're going to be doing on the newer platforms because they very much want us to be there.

And then one more, Eric, and I will hop back in queue. Just speaking some geographically, I guess the fleet age is going to vary by region depending on what markets are replacement markets and what markets are growth markets and specifically everybody is worried about China. I'm guessing geographically that's not a huge PMA market for you quite yet?

Yes, China, as we say, remains a very good opportunity for us. We do sell some parts into China, but I do not anticipate any significant impact on our business whatsoever as a result of specifically China.

Now to the extent China impacts the rest of the world and the rest of the world gets impacted and reduces their flying, then obviously there could be some impact. But with regards specifically to China, no, that's not going to be a major impact for us.

So PMA is probably more highly levered to North America, Europe?

Yes. I would say the world, with the exception of China.

Okay. Thanks a lot, guys.

You are welcome. Thank you.

Robert Spingarn, Credit Suisse.

Good morning, everybody

Good morning.

Eric, staying on the topic, is there a way to quantify the organic growth in same parts? You talked earlier in your monologue about the fact your growth was derived from the introduction of the new parts. Larry, you talked about the R&D that gets you there, but if we looked at a same-store sales on particular parts, can you talk about what is happening?

We analyze those numbers periodically, but we don't disclose what they are because we can't get into, obviously, trends on specific platforms or engines or product types, but we definitely look at that. Most of our growth, again, is through volume change as opposed to pricing. We are not one of those suppliers who ratchets up pricing and gets it that way. If we get 1% to 2% on pricing, that's probably all we get and the vast majority is on volume growth.

Is it fair to say then, just given the softness the industry is seeing, that volumes are modestly down year on year?

I don't have that information in front of me, but with us, we were up, for example, 4% and we're not getting 4% on pricing, so --

No, I know, but you are getting this adoption of the new products, which is organic growth but it's also really market-share driven. And so, as long as you continue to spend on that R&D, I would expect that that market share will continue to grow.

I'm just trying to get a sense, really, about what you just talked about a moment ago, which is the behavior of the airlines. And they have discovered, it seems recently, various means to put off maintenance and trying to figure out how deep that goes and if we're going to start to see some evidence that that is reversing. You talked about it a moment ago, but is it possible they are also sourcing from the surplus market and we may not see that recovery so soon?

No. I don't think so. In the products we provide, there's not a lot of surplus available. We tend to supply more the expendable parts, so I don't believe it's a surplus phenomenon. I think what is going on is that with lower fuel, the airlines are flying some of the older equipment and that is increasing ASMs, but they are not putting money into fixing the older equipment. So really the moment of truth will come out when we find out whether they are going to, in fact, retire or extend the lives of some of these aircraft.

There are certain airlines with certain, what I would say, not competitive non, if you will, current generation aircraft. And we anticipate those to go down, no matter what fuel does, but we don't anticipate those noncompetitive aircraft to be flown beyond their expected retirement dates. But there are other competitive aircraft and with fuel down where it is, it makes sense to extend time on those.

Now I don't believe the industry in general has seen the benefit -- and that is HEICO included, has seen the benefit of extending the time on those older competitive aircraft. And that's really what we're going to end up seeing, I think, as the airlines develop their budgets in the fourth quarter and then we learn about it, of course, perhaps in the fourth and in the first quarter.

Okay. And just a -- yes, go ahead.

For us specifically, we're doing well with the new product introductions. And again, our business is one of -- since we basically enter a product, let's just say, roughly five to 10 years after the initial delivery of the first aircraft, by definition we are in there on the backend as they retire the aircraft. So we do always have -- I mean, as part of our business model, it's always contemplated being on the sunset fleet. But I don't anticipate any significant change to our business model or what we have seen over the last 20 years.

Okay. And then just a question really for all of you, which is in your non-aerospace businesses, if you could just talk about some of the both positive and negative trends that might have been a bit of a surprise? So I think there was some industrial pressure, Eric, in your business. Victor, you had medical and space and then upside in defense. If you could just talk a little bit about that?

The largest non-flight business -- non-aerospace business within the Flight Support Group is this ancillary industrial product line. And again, that was something basically where a customer had come to us a number of years ago, wanted to use an aerospace solution for an industrial product. We went ahead and we did this. We had the orders and then they realized that their unit that they were shipping to customers was not running as hot as they anticipated it to run and they were able just to basically remove the product from the bill of materials.

So it wasn't really a loss to a competitor, but it was really a change in the design specifications. And that is our only significant non-aerospace application. I can tell you that, in terms of foreign military sales, we continue to do very well. We have a little bit of defense exposure and we're doing very well in that area as well.

Rob, this is Victor. I would first tell you that the organic growth in ETG in the third quarter was around 9% in 2014. So we're coming off a sort of heavy comp there. But in terms of the overall markets that we are looking at, defense has been good for us and it's been good for us this year. And I think it hasn't been on fire, but we talked about -- and you and I have talked about this and talked about this on other calls, that we expected that at some point this year we would see defense turning and I think that is happening.

We will have to see what happens, as I mentioned in the earlier comments, with the defense budget, but right now there appears to be support for that as well in Washington. And, by the way, our defense business I think has been good in both domestic capacity and in foreign business. And that's a big chunk of, as I told you in the past, of the foreign destined part of ETG's defense sales probably are, average, in excess of one-third.

By the way, Victor, on that note, do you get any visibility into the behavior of those customers with all this emerging market pressure, et cetera? Do you get to see that or is it too many degrees of separation for you?

I think that's probably too many degrees of separation for us and we're generally not so much on the emerging market side, so we don't really see a lot of that. And then in terms, Rob, of the other markets that we are serving, space has been extremely strong for us and moderated a little bit in the period about somewhere in the neighborhood of half of that or somewhere around that is the result of the heavy foreign sales that we have in euro denomination changes internally when we have to translate back into dollars from our foreign businesses. But I wouldn't say those are weak, but they are just a little bit softer.

And in the other markets that we're serving, again we singled out medical. But again a big chunk of that was related to foreign currency translation changes. In terms of those business's local operations, they have been strong overall. And we are pretty happy with those. And then the other markets are kind of the typical mix that we see out there.

Okay. Thank you.

Thank you.

Chris Quilty, Raymond James

Thanks, gentlemen. I know you don't comment on specific acquisitions, but I think last quarter you did mention an unusually large one that was in the pipeline and I didn't hear mention of that. Has that one slipped off the radar screen or is it potentially still in the pipeline?

Chris, it's potentially still in the pipeline. The acquisitions, as you know, you never can know when they will come around due to [they questions in them] and some of these things take a year and a half or more to incubate and the one that I was thinking about is still around. I don't know where it will wind up. We never do until we get to the closing table.

Got you. And just to circle back on that industrial products, if I remember how long we have been talking about that, is it fair to assume we're about at the end of the negative comps in that or when do we get some relief from that headwind?

Chris, this is Carlos. We will get relief. That will tail off in Q4, so our 2016 numbers will be [comparative] when it comes to that, so it tails off in Q4 and then we should be good. And as Eric mentioned, it's tended to be between $7 million and $10 million a quarter in headwinds for us as a result of those customer orders not being necessary in the current year.

Got you. And, Eric, the better margins in Flight Support Group, are those sustainable looking out into 2016 or were there some one-time benefits that we shouldn't expect to repeat?

Can you repeat your question?

Yes, the flight support margins, better than expected, are those margins sustainable going into FY16 or were there one-time benefits that you derived in the current quarter?

Yes. We have always said that the operating margins in the Flight Support Group run around the 18% level and they move around from the low 17%s up to 19% or sometimes a little bit higher. I wouldn't want to say that anything has changed. There was a greater focus on higher-margin activities in the quarter. There were some lower sales of some lower margin. We do a little bit of parts trading and there definitely was pressure and we decided not to be active in that market where prices, I think, have been bid up by financial buyers who have had a lot of experience in the sector and we decided to sit some of that out.

And those tend to be lower margins, so I think that weighed on our organic growth sales change, but also helped our operating margins. So I would say that if the surplus market continues to show the dynamics that we have seen over the last three and nine months, then they would tend to the upper side. But if that market becomes a little bit more reasonable where we think we have got some good entry points, then it would drop back down a little bit.

Got you. Thank you, gentlemen.

Thank you, Chris.

Michael Ciarmoli, KeyBanc Capital Markets

Good morning, guys. Thanks for taking my questions. Eric or Carlos, back onto the FSG margins, did you guys actually quantify? I mean, it looks like the 50 basis point increase for the year worked out to about $4.5 million. Was all that in the current quarter between the accrued comp and the euro-denominated earnout or is that split between this current quarter and next quarter?

A lot of that was in this quarter. And as mentioned before, some of that was FX related and some of that was related to lower accrued performance-based comp.

Okay. So is that the ballpark number, about $4.5 million, though?

That's very close, yes.

Okay, perfect. And then just, Victor, you mentioned commercial space moderating. Should we be concerned at all what we are seeing flowing, citing the export import bank and potentially laying off workers and the satellite -- domestic satellite market coming under pressure, will that be an impact to you guys in that business line?

I think it is a little too early to tell. It doesn't help us, I don't think. But our sales in the business are spread in a few markets, right? We have got the US businesses, but we also have our French business, 3D Plus, which offsets a certain degree when the US satellite primes are softer. So I think we will have to see how it plays out and give it a little bit of time.

Okay, fair enough. And then just the last one on ETG again. I mean, margins in the quarter, I think the best they have been in quite some time, maybe since that fourth quarter of 2014, but should we expect this sort of 25%-ish level as we move into 2016? Is all the amortization headwind behind you guys? Should we be thinking about this as, again, a mid -- consistent mid-20% segment margin?

Yes, overall, whether it's the same as it was this quarter, remember you have to keep in mind that we have somewhere around 400 -- 300 to 400 basis points of amortization expense which impacts us. When we look at these businesses, we're really looking at 25% as somewhere around, give or take 29%, [in] what I consider to be the true margin of the business, what it derived from making and selling its products and services.

So that's a pretty good number to me. Whether it becomes 28% or 27% or 30%, I will be honest with you, I don't get too worked up about it. To me, it's all pretty similar. So I would hope and expect that somewhere in that range is where we will continue to fall. And I think you will see quarters where it's a little better and I think you will see quarters where it's a little bit off from there. But this range is around the range that seems to make sense for us. Again, whether it's a point or two lower or a point or two higher, it's hard to see.

Great. Thanks, guys. That's all I have.

(Operator Instructions)

James Foung, Gabelli & Co.

Hello. Good morning, everyone.

Good morning.

I just want to see if you could talk about the flow of new products coming in [in the next 12 months]? Seems that's been a big contributor to your profit this quarter, and I'm just wondering if sequentially you can see more of the new product introduction over the next three quarters?

Eric will answer that.

Hi, Jim. I anticipate the new product development over the next three quarters to be consistent with what we have done in the past. I don't think any tremendous changes there. We continue to develop the same kinds of parts we've done as well as entering to other adjacent markets. But I don't anticipate any significant change there.

Okay. But they typically carry a higher margin, right, because you get better pricing from the products than your existing components?

Not necessarily. Not necessarily, especially when a product is new, there may be some initial costs [first articles] until we streamline the process, so it's not necessarily higher margin.

Okay. And shifting gears a little bit on acquisitions, Larry, could you talk about your pipeline of acquisitions? You've been pretty active in the last quarter, in August, making some of these acquisitions. How does it look for the rest of the year going into 2016?

I think the pipeline is good. One of the problems, as we've discussed before, is that we can have a strong pipeline and then we get in there and we do the due diligence, which we do very thoroughly, and we find problems. I can tell you we're looking -- I guess Chris Quilty asked me about one large acquisition. I can tell you we actually -- when I say large, I mean larger than we normally do, but I can tell you there is more than one, but you never know what you are going to find.

For example, Eric and I are having dinner with people tonight on an acquisition and God only knows what we are going to find out. It's just a question of due diligence, digging and so forth. So to predict we're going to do it is very difficult. And I don't like to blow smoke and I don't like to tell people, oh, we are going to do this. There is a good pipeline, but we never know when these things will close and what we're going to find when we look under the rocks.

That is the problem with the acquisitions. Unfortunately, many sellers, just to put it plain, misrepresent. They say they are going to produce apples and they produce oranges. And when we get in there and we start turning over the rocks, we don't like what we see.

Even though we are optimistic, because they give us a great picture and they give us a book and show what a great company it is, and then we start to look and we find out that it isn't. We're very active -- to answer your question, we are very active, but to predict which one is going to stick, we really can't.

Right. So I guess the involvement in activity has picked up more so than in the past, essentially, in terms of spending time in meeting with potential companies.

I think that is accurate. I think there are a lot of transactions. We have actually one and a half people working on -- we used to have one person that's focused strictly on M&A. And recently we hired another individual, a younger person, but the other person that used to do it is kind of -- does it half-time now. He was tired and he wanted to retire half-time. So we have one and a half people. And then, in addition to that, we have Eric, myself, Victor and others, Carlos.

But the pipeline is good. In theory it's good. We are looking in Europe; we're looking in the US. But to predict an acquisition is such a risky thing and to give people false hope -- I do think the more we have, the more likely we are to make more -- the odds are we will do more acquisitions and some of the ones we see are really terrific and we have to nail them down, but as to when and how, I don't know.

And, Jim, this is Eric. If you look, we have done six acquisitions so far this year. And I think what was unique in all of those cases is that HEICO was the preferred acquirer by far by each of those sellers and many of whom are partners with us and were very excited about where they can take their businesses and how we can continue to help them grow their businesses and induct them into the HEICO network.

So I think there is a lot of very good opportunity. We are, as mentioned, working on a number of deals. And I think HEICO remains still the preferred acquirer in these transactions, so we are relatively optimistic there.

You know the acquisitions that Eric is referring to are companies where the seller wants to have a liquidity event, however wants to remain active, is very knowledgeable about his industry, so he winds up with a minority interest of roughly 20% and it's a win-win for us. We are normally not an acquirer that wants to buy a company and take that and shrink it down and get rid of personnel and fire people and so forth. That is normally not our model.

In a few cases we have purchased companies or product lines and put them in, but we prefer to keep the personnel, to keep the company, to keep the management and to work cooperatively. It is just our style.

I think that's a great formula. It keeps the owner motivated in growing the business as part of the larger HEICO Corporation.

Exactly. And we always have put calls and we will go over anywheres from three years to eight years or something, so they can put the stock to us over a period of time and we can call the stock over a period of time. Interestingly enough, in some of these cases -- in many of the cases, the people have cashed out completely and they still continue to run the company and they are compensated, incentivized and so forth, and the relationship remains very strong.

As a matter of fact, probably our best sales tool is to give a potential company that we want to acquire a list of 10 or 15 names of people from whom we have acquired companies and we say just call them up and ask them. That is really the best sales tool, because they do that and they find out that HEICO does what it says it's going to do. If they promise you something, that's exactly what will happen. That's our formula and it works.

Okay, terrific. Thank you for the update and look forward to seeing you at the conference on September 9.

Right. Thanks, Jim.

Steve Levenson, Stifel.

Thanks. Good morning, everybody.

Good morning.

Just wondering, there is a huge installed base of CFM 56 engines of various types. And over the next few years, CFM will be winding down production of that engine and shifting over to the Leap. Do you see HEICO's role changing on the CFM 56? Do you see an additional investment required in parts development or do you think it will just go along as it is now?

Steve, that's a good question. Unfortunately, we can't comment on specific engine platforms or customer relationships, but we are watching all of the various developments out there and plan to remain active and do what our customers want us to do.

Okey-doke.

We anticipate the follow-on engine to be very successful as well as a [Pratt] option as well.

Okay. Rather than ask on a specific engine then, maybe we can look back on previous engines of any types. In general, has the role changed? Do you find yourself being asked to deliver additional parts or develop additional parts to supplant what the OEM had made?

I would rather not answer the question, due to competitive dynamics. We're active across a wide array of engines, as well as components, the airframe parts, and we're basically all over the aircraft. We are not going to want to necessarily develop a part at the end of its life, because we are not going to be able to recover our investment, but we're --

No, I just meant because the engines -- the last engines will still be in service for 20 years.

Right. But we're active, I would say -- on anything that's flying, we want to be active on it.

Got it. Thanks very much.

Thank you.

At this time there are no further questions. I'll now return the call to Laurans Mendelson for any additional or closing remarks.

I want to thank everybody on this call for their interest in HEICO. We remain available by phone or personal visit to answer questions which you may have. I am sure we are going to get a bunch of calls. Carlos and Tom are going to get a bunch of calls this afternoon for further detail, but we are open to your questions and anything we can do to help you, please let us know.

Until then, we wish you a good balance of the summer, a happy Labor Day, and we will speak to you with the fourth-quarter conference call which will be probably around the mid-December date. So this is all we have for the moment and we will speak to you soon. Bye-bye.

Thank you for participating in HEICO Corporation's FY15 third-quarter earnings results conference call. You may now disconnect your lines and have a wonderful day.

Thank you.