HEICO Corp (HEI.A) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for holding. I would like to welcome everyone to the FY15 fourth-quarter and full-year results conference call.

Certain statements made in this call will constitute forward-looking statements, which are subject to risks, uncertainties, and contingencies. HEICO actual results may differ materially from those expressed 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 cost and requirements, which could cause an increase to our costs 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 product and product pricing levels, which could reduce our sales or sale growth.

Product development difficulties, which could increase our product development cost and delay sales, our ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest, income tax rates, and economic conditions within and outside of the aviation defense, space, medical, telecommunications and electronic industries, which could negatively impact our cost 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-K. We undertake no obligations 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 Larry Mendelson. Please go ahead.

Thank you very much, and good morning to everyone on the call. We thank you for joining us, and we welcome you to this HEICO fourth quarter and full year FY15 earnings announcement telecon. I'm Larry Mendelson, I'm the Chairman and CEO of HEICO. 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.

Before reviewing our operating results in detail, I'd like to take a few moments to summarize the highlights of our record fourth quarter and full fiscal year results. Our consolidated fourth quarter FY15 net sales of $328.7 million, operating income of $69 million, and net income of $38.3 million, represent record results. Driven principally by the impact of our FY15 acquisitions, as well as increased sales and profit margins for certain of our existing products, both within flight support and electronic technologies.

Consolidated FY15 net sales of $1.1886 billion, operating income of $229.7 million, and net income of $133.4 million also represent record results, driven principally by the impact of our FY15 acquisitions, as well as increased sales and profit margin for certain of our existing products, both within flight support and electronic technologies. Consolidated fourth quarter FY15 operating income and net income are up 28% and 19% respectively, on a 12% increase in net sales. In addition, our consolidated operating margin improved to a very strong 21% in the fourth quarter of FY15, up from 18.4% in the fourth quarter of FY14.

I just want to point out that that is after the deduction of amortization of intangibles. And that number -- Carlos can go into it a little bit later -- but it generally runs about 3% or 4%. So from our point of view, the real operating margin, or what we call the cash flow margin, is somewhere between 24% and 25%.

Consolidated FY15 operating income and net income are up 13% and 10% respectively, on a 5% increase in net sales. In addition, our consolidated operating margin improved to 19.3% in FY15, and that was up from 18% in FY14. Same comments apply to the amortization of intangibles. So our real cash operating -- what we call controllable margin -- was about 3% or 4% higher.

Consolidated net income per diluted share increased 17%, to $0.56 in the fourth quarter of FY15, and that was up from $0.48 in the fourth quarter of 2014. Consolidated net income per diluted share increased 9%, to $1.97 in FY15, and that was up from $1.80 per diluted share in FY14.

Flight support set a quarterly net sales and operating income record in the fourth quarter of FY15, improving 12% and 28% over the fourth quarter of FY14, respectively. The increase principally reflects net sales contributed by our 2015 acquisitions -- FY15 acquisitions -- and increased sales and profit margins for certain of our existing product lines.

Our ETG group set quarterly net sales and operating income records in the fourth quarter of FY15, improving 13% and 24% over the fourth quarter of FY14. The increase principally reflects net sales contributed by our FY15 acquisition, and increased sales and profit margins for certain of our existing products.

Cash flow from operating activities was $172.9 million in FY15, and that represented 130% of net income. Our cash from operating activities was slightly below our original estimate of $200 million, primarily as a result of an increase in accounts receivable, which reflected strong sales late in the fourth quarter, and an increase in inventory to meet increased sales demand in the near term.

As of October 31, 2015, the Company's net debt to shareholders' equity ratio was 37.4%, with net debt, which is total debt less cash, of $334 million. Additionally, our net debt to EBITDA ratio was a very low 1.2 times, as of October 31, 2015. That compared to 1.23 times, as of October 31, 2014. And this was in spite of a year in which we closed six acquisition transactions. We're very pleased to have closed three accretive acquisitions in the fourth quarter of FY15, and they were all done in August 2015.

Flight support acquired all of the outstanding shares of Astroseal products. And Astroseal manufactures expanded foil mesh, which is integrated into composite aerospace structures for lightning strike protection, in both fixed and rotary wing aircraft. Astroseal augments our Flight Support Group's expanding offering of aerospace composite products.

ETG acquired 80.1% of the equity of Midwest Microwave Solutions -- we call it MMS -- and they design, manufacture and sell unique size, weight, power and cost optimized communications, and electronic intercept receivers, and tuners for military and intelligence applications. MMS expands HEICO's intelligence gathering equipment business, and perfectly matches with HEICO, in that it makes difficult to design and very unique devices. It's focused on customer satisfaction and growth, and most importantly, it has top notch and committed management team.

Flight support acquired 80.1% of the assets, and assumed certain liabilities, of Aerospace & Commercial Technologies. We call it ACT, A-C-T. And they are a leading provider of products and services necessary to maintain up-to-date F-16 fighter aircraft operational capabilities.

The acquisition expands our reach into the defense market support, and extends HEICO's business base in this very important sector, which we see as a growing part of HEICO as we move forward. Additionally, in December 2015, a subsidiary of ETG acquired all of the assets, and assumed certain liabilities, of a company that designs and manufactures underwater locator beacons used to locate aircraft cockpit voice recorders, flight data recorders, marine ship voyage recorders, as well as other devices, which have been submerged underwater.

As we reported earlier this week, we declared an increased regular semiannual cash dividend of $0.08 per share, and that's payable on January 19. This dividend declaration represents our 75th consecutive semiannual cash dividends, and it is a 14% increase over the prior semiannual per-share amount of $0.07.

By declaring and raising the semiannual cash dividend, the Board of Directors' goal is to confirm its continued confidence in HEICO's consistent growth strategies, and to reward our shareholders. While at the same time, retaining sufficient capital to fund our internal growth objectives and acquisition strategies.

At this time, I would like to introduce Eric Mendelson, Co-president of HEICO and President of HEICO's Flight Support Group. And he will discuss the results of the Flight Support Group. Eric?

The Flight Support Group's net sales increased 12%, to a record $218.3 million in the fourth quarter of FY15, up from $194.8 million in the fourth quarter of FY14. The increase principally reflects net sales contributed by our FY15 acquisition. The Flight Support Group's net sales increased 6%, to a record $809.7 million in FY15, up from $762.8 million in FY14. The increase reflects net sales contributed by our FY15 acquisitions, as well as additional net sales in our after-market replacement parts and repair and overhaul services product lines, principally from new product and service offerings.

Further, these increases were partially offset by lower net sales of certain industrial products within our specialty products lines. As a result of the aforementioned lowered net sales of certain industrial products, the Flight Support Group experienced a 1% organic revenue decline in FY15.

Excluding the impact of the decline in net industrial sales, the Flight Support Group experienced organic growth of approximately 3%, in both the fourth quarter and FY15. As previously noted, the lower industrial products net sales is principally attributed to the completion of a customer's multi-year orders in late FY14.

The Flight Support Group's operating income increased 28%, to a record $42.3 million in the fourth quarter of FY15, up from $33.2 million in the fourth quarter of FY14. The increase principally reflects a more favorable product mix within our after-market replacement parts, and repair and overall services product lines, and the previously mentioned net sales growth. The Flight Support Group's operating income increased 10%, to a record $149.8 million in FY15, up from $136.5 million in FY14.

The increase principally reflects the previously mentioned net sales growth, a decrease in general and administrative expense, and a more favorable product mix, partially offset by an increase in amortization expense of intangible assets recognized in connection with the FY15 acquired businesses. The Flight Support Group's operating margin improved to 19.4% in the fourth quarter of FY15, up from 17% in the fourth quarter of FY14. The increase principally reflects the previously mentioned more favorable product mix within our after-market replacement parts and repair and overhaul services product lines.

The Flight Support Group's operating margin improved to 18.5% in FY15, up from 17.9% in FY14. The increase principally reflects lower general and administrative expense, and a more favorable product mix, partly offset by the increase in amortization expense associated with FY15 acquired intangible assets.

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

Eric, thank you. The Electronic Technologies Group's net sales increased 13%, to a record $113.5 million in the fourth quarter of FY15, up from $100.1 million in the fourth quarter of FY14, and increased 3% to a record $391 million in FY15, up from $379.4 million in FY14. The increase in both the fourth quarter and FY15 were driven mainly by the impact from a late FY15 acquisition, and increased demand for the majority of our products, which resulted in 5% and 1% organic net sales growth in the fourth quarter and fiscal year ended October 31, 2015, respectively.

The Electronic Technologies Group's operating income increased 24%, to a record $32.8 million in the fourth quarter of FY15, up from $26.4 million in the fourth quarter of FY14, and increased 11%, to a record $98.8 million in FY15, up from $88.9 million in FY14. The increase in both the fourth quarter and FY15 principally reflects a more favorable product mix for certain defense products, net sales growth, the impact of impairment losses recorded in the prior year, related to certain intangible assets, and lower amortization expense of intangible assets. Partially offset by the impact of a prior-year reduction in the estimated fair value of accrued contingent compensation.

The Electronic Technologies Group's operating margin improved to 28.9% in the fourth quarter of FY15, up from 26.4% in the fourth quarter of FY14. The Electronic Technologies Group's operating margin improved to 25.3% in FY15, up from 23.4% in FY14. The increase in both the fourth quarter and FY15 resulted mainly from the more favorable product mix, impact of prior-year impairment losses, and lower amortization expense of intangibles, partially offset by our prior-year reduction in the estimated fair value of accrued contingent compensation.

I turn the call back over to Larry Mendelson.

Thank you, Victor and Eric. Moving on to earnings per share. The diluted consolidated net income per diluted share increased 17%, to $0.56 in the fourth quarter of FY15, and that was up from $0.48 in the fourth quarter of FY14. And they increased 9% to $1.97 in FY15. That was up from $1.80 in FY14. The fourth quarter and FY14 included a net benefit of $0.03 and $0.15 per diluted share, respectively, mainly from the previously mentioned reduction in the estimated fair value of accrued contingent consideration that was partially offset by impairment losses to certain intangible asset associated with the prior-year acquisition.

Depreciation and amortization expense increased by 12%, to $12.8 million, in the fourth quarter of 2015. That was up from [$11.5 million] in the fourth quarter of 2014. And totaled $47.9 million and $47.8 million in FY15 and FY14, respectively. That increase in the fourth quarter of FY15 principally reflects the incremental impact of higher amortization expense of intangible assets and depreciation expense, attributable to our FY15 acquisitions.

SG&A expense increased 18%, to $57.8 million, in the fourth quarter of FY15. That was up from $49.2 million in the fourth quarter FY14. The increase in fourth quarter 2015 primarily reflects the impact of the previously mentioned prior-year reduction in estimated fair value of accrued contingent consideration, and $4.6 million contributed by the FY15 acquisitions. And they were partially offset by previously mentioned prior-year impairment loss, and decrease in accrued performance-based compensation.

SG&A expenses increased 5%, to $204.5 million in FY15. That was up from $194.9 million in FY14. The increase principally reflects the previously mentioned reduction in the estimated fair value of accrued contingent consideration, and additional $7.2 million contributed by FY15 acquisitions. And they were partially offset by prior-year impairment losses resulting in lower current-year amortization expense and decreased accrued performance-based compensation, as well as the impact of foreign currency gains on our euro denominated borrowings.

Interest expense totaled $1.3 million in both the fourth quarter of FY15 and FY14. The expense decreased to $4.6 million in FY15, down from $5.4 million in FY14. That decrease was principally due to a higher weighted average balance outstanding, under our revolving credit facility, in FY14. And that was associated with our FY13 acquisitions, and the acquisition of certain non-controlling interest in FY14.

Our effective tax rate increased to 34.5% in the fourth quarter of FY15. That was up from 31.3% in the fourth quarter FY14, and it increased to 31.7% in FY15, up from 30.1% in FY14. That increase is principally attributed to the impact of the reduction in accrued contingent consideration, as well as unrealized gains in the cash surrender value of life insurance policies, related to our deferred comp plan in FY14. Both of these are non-taxable.

The increases were partially offset by higher R&D tax credits recognized in FY15, due to the retroactive extension of the US R&D tax credit, as well as additional foreign tax credits related to R&D activities at one of our foreign subsidiaries, and the impact of a FY15 foreign acquisition, which was in a lower tax jurisdiction.

Net income attributable to non-controlling interest increased to $5.8 million in the fourth quarter of FY15, up from $4 million in the fourth quarter of FY14. And increased to $20.2 million in FY15, up from $17.5 million in FY14. The increase in net income attributable to non-controlling interest in the fourth quarter and FY15 principally reflects the impact of net income allocations to certain of the FY15 acquisitions, in which non-controlling interests are held.

Now, moving on to the balance sheet and cash flow. Our financial position and cash flow remain very strong. As I previously mentioned, cash flow provided by operating activities totaled $172.9 million in FY15. And that reflects an increase in earnings and the impact of certain non-cash adjustments.

Strong working capital ratio improved to 3 times as of October 31, 2015. That was up from 2.8 times in October 31, 2014.

DSO, days sales outstanding, of receivables was 51 days on October 31, 2015, up slightly from 47 days as of October 31, 2014. And that reflected the impact of higher sales volume late in the fourth quarter of FY15. Of course, we continue to closely monitor all receivable collection efforts, in order to limit our credit exposure. I remind you that we rarely have losses from accounts receivable, bad debt.

No one customer accounted for more than 10% of net sales. Our five top customers represented about 17% of consolidated sales, in both FY15 and FY14.

Inventory turnover increased to 118 days, as of October 31, 2015, and that was up from 108 as of October 31, 2014. That reflected, mainly, our FY15 acquisitions on inventory levels in the Flight Support Group, and other inventory increases to meet increased sales demand in the near term.

Our net debt to shareholders' equity was 37% as of October 31, 2015. Net debt of $334 million, principally incurred to fund acquisitions and the payment of special cash dividends, which we declared in FY14 and FY13. We have no significant debt maturities until FY19, and we plan to continue utilizing our financial flexibility to aggressively pursue high-quality acquisition opportunities.

Just a comment on debt. We have a wonderful revolving debt facility, which is led by a group of fantastic banks. We work very closely with them, and I can say they are just top notch.

The outlook. As we look forward to FY16, we do anticipate net sales growth within flight support product lines that serve commercial aviation and defense, and for certain of our industrial products within specialty product lines. We also expect growth within ETG compared to FY15. And that will be principally driven by demand for our defense and commercial aerospace products, moderated by slightly lower demand for certain of our space-related products.

During FY16, we will continue our commitments to developing new products and services, further market penetration, and an aggressive acquisition strategy, while maintaining our financial strength and flexibility. Based upon our current economic visibility, we are estimating year-over-year growth, in both net sales and net income, of approximately 8% to 10% over FY15 levels, with our consolidated operating margins approximating 18.5%. These estimates exclude additional acquired businesses, if any.

In addition, we anticipate depreciation and amortization expense of approximately $57 million, CapEx to approximate $30 million, cash flow from operations to approximate $200 million, and a combined effective tax rate, and non-controlling interest rate expressed as a percentage of pretax income. And that should be around 39%. Approximately half of the aforementioned net sales growth is expected to be organic, and the other half generated from the 2015 acquired businesses.

Within flight support, we currently estimate FY16 net sales growth to approximate the previously mentioned FY16 consolidated net sales guidance, and the full-year operating margin of flight support to approximate the operating margin achieved in FY15. With respect to ETG, we currently estimate FY16 net sales growth to approximate the aforementioned FY16 consolidated estimates. And the full-year operating margin to approximate 23.5%, which is consistent with ETG's operating margins experienced during the three preceding fiscal years, which ended October 31, 2014.

In closing, I want to thank the HEICO team members. It's through their dedication and efforts that we've achieved our significant 25 year compound annual growth rate of approximately 16% in net sales, 18% in net income, and 21% in our stock price.

One further comment. My special thanks and appreciation go to our HEICO team. They are the ones that produce the extraordinary results. These are dedicated, honorable, very hardworking and extremely intelligent group of executives and people, underneath the top level of each of our companies. They are the ones that make this happen. And I, and the Board of Directors, and the shareholders, of course, are extremely thankful for the hard work that they contribute.

Those are the extent of my prepared remarks, and I would like to open the floor for questions. Thank you.

(Operator Instructions)

Our first question comes from the line of Larry.

Hi, good morning. Larry Solow, CJS.

Hi, Larry.

Good morning, Larry and gentlemen. Quickly, just on -- Larry, you're in a generally flat year on revenue, on an organic basis, yet you still had fabulous growth in the year. I think 19%, or close to 20%, on the net income basis, excluding your earn-out in 2014. So congrats on that great year.

As you look out to 2016, it sounds like you expect organic growth to return into the mid single digits. So the 8% to 10% total net income growth, what are some of the puts and takes there? And it seems -- and I guess -- I think the real thing, it looks like you're expecting a little bit of a contraction in profit. And what's some of the factors behind that?

I'll give you an overall comment, and then give it to Victor and Eric to -- if they want to further illuminate. So in general, we come out of the box, I think as you know, historically, with a bottoms-up projection based upon the budget, which is submitted by all of the subsidiaries. We don't push them to sandbag it.

We don't want them to make it too high, and we prefer to look at it on a conservative basis. And annually, we generally increase, as we go through the year. That's been the history of HEICO.

And I think we do it -- we have done it in exactly the same way. We've said that the fourth-quarter margins were extremely high. So we don't know -- we don't want to project, and tell the public we're going to do that, and make promises that we might not fulfill.

So I think the 8% to 10% is a number which we feel is definitely achievable, that we're not going to disappoint anybody. And as you know, it does not include any acquisitions, if, in fact, we make them.

Now, I'm going to comment on acquisition, because I'm sure somebody's going to ask me the question. Maybe you were going to ask it to me the next question.

But we have a very full pipeline of acquisitions. The acquisitions are within our normal range, in terms of pricing, and would all be accretive in the first year of acquisition. So if we are successful in closing these acquisitions, I would expect the 8% to 10% to start to move up, and hopefully that will happen and I'm optimistic that, in fact, it will happen. It's a law of averages.

We won't make all the ones that are on our plate. But the more we have in the pipeline, the more we are likely to make. And I can tell you that our staff is just up to their ears, Carlos Macau and his people, the financial people. There are not enough hours in the day to do the 10-K, which we have to file tomorrow, and the other financial information, and then do the financial due diligence that must be done. And as you know, we do the financial due diligence in-house. Our people, who know what we're looking for, go out in the field.

So I feel highly confident that we are going to make those -- a good number of those acquisitions. And hopefully -- and of course if we do, I'm sure we'll be able to move up the projected growth. I don't know if that answers your question.

Absolutely. No, I appreciate the color. Just one quick follow-up, just in terms of your view on the after-market.

Clearly, it was a little bit disappointing versus the beginning of the year expectations, on an industry-wide basis and you guys did outperform the industry with, I think, 3% growth, you said. Do you think we're stable around that number? Or do you see, as you look out, an improvement in the upcoming year?

I'm going to let Eric respond to that.

Larry, this is Eric. I think if you look at 2015, when we started the year, some of the other industry participants were a little bit more optimistic than we were, in terms of a rebound in 2015. We were far more cautious, and of course, we received most of our orders in the month of shipment. So we don't have a tremendous amount of visibility.

So I think that we're quite pleased with our performance. Certainly, if you look at the profitability -- and our business units are measured on profitability, not on sales.

Right.

So I understand that our investors look at organic growth, and they want to see what those numbers are. But again, our business units are focused on profitability, and they did really quite well.

I think that the market is settling out in this area. There's been a lot of talk in the marketplace about the changing landscape of the after-market, with airlines focusing on keeping less inventory, and really driving down their costs. And I think that the OEM purchases have become really the purchases of last resort.

Airlines are trying to figure out, can they buy the parts as PMA or surplus, rather than spend the big prices, and get them from the OEMs. So I do think that it's settling it out -- settling out at this area. I think it's too early to try to call a rebound.

I am aware of certain areas where sales were depressed last year, and you would ordinarily anticipate them to bounce forward, especially with fuel prices where they are. But I think we like to be very conservative, and not predict until we see a rebound.

I do know that our pipeline to develop new products is very robust. We're doing extremely well getting our new products sold to our customers. So I'm very optimistic on our performance, compared to the industry sector, the industry as a whole.

But getting back to your 3% question, I think that's probably realistic for the industry, low single digits, maybe as high as mid single digits. But I wouldn't anticipate a snapback of double digits at this point. Again, we'll watch that, and see how that evolves over the next couple of quarters.

Got it. Great. Thanks very much, Eric.

Your next question comes from the line of J.B. Groh of D.A. Davidson.

Good morning, guys.

Good morning, J.B.

Couple questions for Eric. I guess playing on this after-market theme, you've got a lot of new aircraft in development that are going to be coming online in the next couple years, low fuel prices, good profitability. Can you comment on what airline customers are saying about just PMA in general? It seems like some of these things would be a little bit of a headwind for PMA, in general. But I think it's, like I've always said, like the generic Advil, once you go PMA, you don't go back. But just your thoughts on that would be real helpful.

Okay. Sure, J.B. We, in conversations with the airlines, PMA has got its highest acceptance in its history, by far. And if you look at a number of the airlines, who are being very careful about their fleet plans, and wanting to make sure that they harvest all the aircraft that are out there, and are looking at fuel and saying that they're better off keeping some of the older equipment, I think that that puts us in very good position.

Of course, as new aircraft are delivered, they don't need parts for, let's just say, the first five years or so. So to the extent that those new aircraft replace retiring aircraft, that would be a headwind for us. But again, you've got, whatever the number is, 15,000 aircraft in the fleet that are aging one year per year and those are very, very expensive to maintain, and increasingly more expensive to maintain.

In conversations with the airlines, I think that, as long as fuel stays down at this level, perhaps some of the backlog is at risk. But the airlines really want to see fuel maintaining at this level, and not being a blip on the horizon.

So there's really been no dramatic change with the direction of our business. We continue to increase market share, whether it's on PMA, or DER repair, or component overhaul, distribution.

We're very, very strong in the after-market, and I think doing very well. So regardless of the new aircraft that get delivered, I think we're going to have very good positions on those aircraft, as they ultimately will need parts. But of course, there is that short-term headwind, to the extent that the older equipment get retired.

So I know it's a squishy number to get at, but what's your sense on what the PMA penetration is? And I know it's going to obviously vary a lot, by how old a particular model of aircraft is. But, say, on your standard 737-NG, what's the PMA penetration? And what's the max capability there?

We think that we're far from the max. Backing up, and a lot of people have been looking, Kevin Michaels, over at ICF, has done some very nice work about what's going on with the after-market, and has spoken at a number of conferences. His latest material shows that a commercial aircraft's material spend is roughly $38 billion, and PMA parts are roughly 1% of that number.

So I think there's a big opportunity to grow that number, used serviceable material, he's saying is the 9% area. But I think it's -- and parts included, parts repair, including DER, is 22%.

So I think that there's a very large opportunity that continues to be available out there. Also, if you look at those aircraft, they're continuing to wear and age, and show their age, and they need parts that they hadn't needed in the past. So I think that that's also an opportunity for us.

Great. And could you remind us what percentage of FSG is industrial?

Industrial would be less than 5%.

Okay. And then a quick one for Victor. Probably the best margins we've seen in your group there for a really long time. And I know, on a quarter to quarter basis, they're [bald].

I think you mentioned some good product mix, specifically in military. Could you give us any more details on what within military has been strong? And your general thoughts on military. We're starting to hear mildly more positive comments from some companies.

J.B., this is Victor here. I would say that, generally speaking, some of our actually longer cycle businesses in the military side were a little bit stronger during the last part of the year. And I think we hinted at that, in some earlier conference calls, that we were seeing some strengthening there.

In terms of the defense budget, it's, of course, very difficult to predict what's going to come out of Washington at any time. But there does seem to still be a general consensus for investing in our military. We also see that outside the US. And of course, it makes sense, with what's going on around the world today, with violence and terrorism and so forth.

So we're generally optimistic. I wouldn't get -- by the way, I wouldn't imply, out of that, that we're going to see growth rates like we saw in the early 2000s, as we were engaged in the early stages of Afghanistan and Iraq. But if you look to the mid to low single digits growth rate in defense, that's the way we view it at this point.

And like you said, on the margins, to be honest with you, the way I look at it is, I add back somewhere around 400 basis points of amortization, to evaluate our businesses. Because amortization is not an operating expense of a business. It's not a cost of sales. It's a cost that you incur running a business.

So when I look at our guys, and I see they're running up in the 29%-ish percent rate on a real -- what I consider to be a real margin, I can't get too upset if it's 28% the next quarter, or 27.5%, or something like that. To me, they're still excellent, incredible numbers. So I don't split the hairs too much.

And so, at this point, my own planning is that we won't get those same margins in 2016, but I don't know. And we're certainly working to do that. We'll see what happens.

Thanks for your input, guys, and congratulations on another great year.

Thank you.

Thank you.

Your next question comes from the line of Robert Spingarn of Credit Suisse.

Good morning, everybody.

Good morning.

So following up on some of the questions that have been asked already, with regard -- Eric, with regard to the PMA, what are the trends that you're seeing lately, between airframe and engine? How do we think about that?

As we've said for a while, our -- we've had a larger emphasis over on the non-engine part of our business. HEICO started out originally as the buyer of one particular part, for one particular engine that was made by one particular OEM and then we got into other parts for that engine, and then other OEMs. And then the airlines asked us to get into the component area.

So a majority of our sales are for non-engine applications. I think everybody's aware that the engines have become more competitive. The OEMs have become very aggressive in that area.

We continue to develop engine parts. We continue to do very well. Airlines want to continue to procure those parts, and want us to develop other ones. But we've had a big diversification focus, for the last 15 years, on the non-engine side and now that represents a majority of our sales.

So I think that trend will continue, with our non-engine percentage continuing to tick up over the years. But I don't want to give off the impression that we aren't focused, and aren't continuing to develop engine parts, because we are and we think that that's a very good opportunity.

In addition -- and of course, nobody knows where this is going to end up -- but the European Commission has launched an inquiry into, in particular, the engine maintenance market. And we'll see where they end up, and whether they launch a formal investigation or not. But that, of course, could change some of the dynamics in the engine business.

A lot of airlines feel that they have had a lack of choices, because typically, the parts just come from one manufacturer. And we think that a lot of the airlines feel that, if there were more competition, that they'd be able to more significantly reduce their costs. So we'll see what happens there.

Rob, I just want to clarify one thing. That when Eric talks about accessories, he is including many other parts of the aircraft besides airframe, because your question was engine airframe.

A lot of the things we do are not PMA parts, are non-airframe also. We do some airframe. We do some cabin parts. But it's all over the aircraft.

Right, when I say non-engine, I'm talking non-core engine. Part of our components business is engine controls, and parts that go around the engine, but actually aren't core engine parts.

Okay. That's helpful. I wanted to ask -- you brought up the investigation. Do you think there's a chance that this -- that power by the hour gets brought into this thing?

Yes, I think that the EC is looking into this and I think their investigations is going to be very comprehensive, from what we've read in the papers. They're looking into the lack of alternatives there, and they are looking into the power by the hour.

Okay. And then higher level question. This might actually -- I don't know, maybe Carlos, this is for you. But the revenue growth target for this coming year, how much of that is organic, versus full year contributions of 2015's acquisitions?

Right now, Rob -- thanks for your question. Right now, we're looking at about half of the growth that we've projected coming from our FY15 acquisitions, and about half the growth coming from organic growth in our existing businesses.

Okay. Okay. Wanted to ask -- I guess this actually -- Eric, this goes back to you. You mentioned the surplus fleet and the retirement of old aircraft. Do you have any sense -- do you guys do any internal studies that can predict when the USM inventory, the surplus material inventory, flushes out? Is there any milestone all of the prior generation or out-of-production aircraft are retired? And therefore, none are flying, and that does it?

I think that with the used serviceable, there's still plenty of assets [left to] be parted out. We know that long term, those assets are going to come out of the fleet. So I think that it's going to be a while until that goes away.

But if you look at it, we don't believe that the used serviceable market really impacts our business significantly at all, because most of our parts are expendable parts, and they're not typically salvaged when an engine or an airframe [is] worn down. So I don't believe that that's going to have a significant impact on us.

Okay, and then just one last one. Larry, this one's for you. The special dividends the past couple of years, how do we think about that, going forward? What's the strategy behind those? Does it occur during a period where acquisition activity is lower? Or anything else behind that?

My first comment is, we don't think about it, going forward. But seriously, when we did those -- it had nothing to do with the acquisition activity. It was an opportunity to reward shareholders at a lower tax base, so they would pay lower taxes when they raised the dividend rate.

So we did it. We thought that it would be appreciated. It really didn't affect our ability to make acquisitions, and we're very careful, when we did it, to make sure that we had the financial flexibility to make all the acquisitions that we would have needed to continue our growth.

So no, it really didn't impact that. And right now, we're focused -- as I said earlier in this call, we're focused on a number of acquisitions. Some could be larger than we normally do, and I'm optimistic that we will close them.

However, the caveat is, until it's closed, it's not closed. So we've seen deals die at the last minute. But I'm optimistic that we will make these acquisitions. They could be larger than normal.

Some will be normal sized. But we have plenty of financial flexibility. Were we to declare a dividend, we would have the financial flexibility. But at this point, the Board did not focus on that at our recent meeting.

Okay. And then just lastly, Victor, if I could just turn to you. I know I said that last one was the final one, but I don't want to leave Victor out here. Could you just --

Sure.

Talk about the trends within the end markets in your business, space versus defense? We've heard some commentary on different directionality there. And how we think about 2016, from your end markets?

Sure, Rob. Thank you. That's a good question.

Generally speaking, the way we're looking at it is, on defense, as I said, mid to low single digits in the market overall for us, and for what we're doing. I think we believe that commercial space probably will be flattish. I mean, may be up a little, may be down a little, but it's a lumpy thing. But we're generally thinking flattish.

And then in the other markets that we're serving, for our products -- again, because we do a bottoms-up budget for each one of our companies. So sometimes, the market may be growing at a different rate than the business, but it's based on their wins, and so forth, and their successes. And so those, we're looking at lower to mid single digits, let's say, on general electronics, and things where we serve medical. Commercial aviation may be a little bit better than that, because of some of the things we've done there. But that's generally our thinking.

Okay. Thank you all very much.

Thanks, Rob.

Thank you for asking.

Your next question comes from the line of Sheila from Jefferies.

Hi. Good morning, everyone. Thank you for taking my question.

Good morning.

Good morning. Victor, I have two for you, if you don't mind. Just on MMS, the contribution seems a bit higher than I thought. Could you maybe -- just given the number of employees the business has, could you maybe talk about that a bit?

Sure. MMS is a great Company that has an excellent production method. They are really a remarkable team of mostly engineers. It's an engineering group, with some very talented technicians, assembly and test people.

So they have a model where they do most of their production externally, and do a fair amount of test and assembly internally. So that's really the nature of the business, and they've been doing that for a while, and very, very successful. And their great value add, I think, is on the engineering side, and their responsiveness to their customers. So they have, it appears, a very sticky customer base, as and they're doing unique products, which generally command a lot of respect and attention for their customers.

Thank you. That's helpful.

You're welcome.

Is there a specific contract that drove the fairly healthy revenue in the quarter? Or can we expect that continued run rate?

They have a number of contracts, and that's going to move around. It's going to be -- it's one of these lumpier businesses. I would expect them to stay a very healthy business, but I would certainly expect that to move around from quarter to quarter and there will be quarters where it's much less, and there will be quarters where it's there, or maybe even higher. And it should average out to, at this point, we believe, what we were looking at when we acquired the business. So far, so good.

Okay, that's helpful. And then on the defense business, you mentioned an improvement. Could you maybe talk about, are you seeing an improvement in build rates? Or is it air support that's increasing?

Ours is really -- the ETG's defense business is not so much an after-market business. There's a little bit that you would consider after-market.

So it would generally be related to production of equipment. Sometimes, it's retrofit related. But more often than not, it would be new equipment.

Got it. Thanks. And then Eric, one for you, if you don't mind. I'll ask your 15th after-market question. Are you seeing any changes in buying behavior, whereas people might pool spares a bit more? Or is there a pickup with Boeing's Gold Care and Airbus's FHS program that's driving how airlines are buying now? Or I don't know, if you could talk about that a bit?

Sure, Sheila. With regard to the Boeing and Airbus programs, we haven't seen a big pickup in areas that would impact us. So we're not really concerned about that at the moment.

But with regard to buying behavior, yes, a number of airlines have really started focusing on the amounts of inventory that they take in, and are holding very little inventory currently. So when they place an order, they need to make sure that they get the part, because otherwise they don't have it.

They used to give buyers more autonomy to purchase parts, and now, they've become very, very careful about spending money. I had mentioned before about, in concept, purchasing from the OEM becoming more of a purchase of last resort. And the buyers are trying to figure out where they can buy the parts, really, at any other place.

So in general, I would say reduced inventories are really shortening the lead time that suppliers have to deliver a part, because airlines don't want to hold inventory any longer, and have become very focused in that area.

Thank you. That's very helpful.

Thank you.

Your next question comes from the line of Kevin Ciabattoni of KeyBanc Capital Markets.

Hi, good morning, guys. Couple quick ones from me. Victor, first one for you, I guess. You mentioned the margin outlook for next year at a high level, obviously well below what we saw from your group in the back half of 2015 and I can appreciate some conservatism. But just wondering if there's anything else specific, within the operating margin outlook for next year, as to why it's down versus what we've seen the last couple quarters?

Yes. By the way, I don't view it as well below, I view it as a little below. But it's really the mix, and where things fall in and so that's really what drives it. So we'll see how the year goes. But there's nothing -- beyond, really, the mix of sales and products between the different businesses, I think gets more to the normal rate that you saw.

Okay. That's helpful. And then just one more from me. I know we're probably running short on time here.

You talked about, receivables were up, you saw some ordering (technical difficulty) in the quarter. Anything there, specifically, that we can expect to see continue into 2016? Or was it more just a matter of customer order timing?

Kevin, I'm going to ask Carlos to respond.

Kevin, this is Carlos Macau. It's a good question. I think principally what drove the increase in receivables at year end was a very strong late-quarter finish for the Company. We had good growth, and good sales, out of our divisions.

Probably two-thirds, to maybe a little bit more than the growth in that receivables business is really based on the strong late-quarter sales and the rest of it was due to additional growth in receivables from our acquired companies. So those are all positive. And as Larry mentioned earlier, we watch our credit very closely, on all of our customers, and the cash flows on those receivables are supporting the quality and so we have no worries there.

Okay. Thanks.

Your next question comes from the line of Steve Levenson of Stifel.

Thanks. Good morning, everybody.

Good morning, Steve.

I know you all have mentioned a few times on the call, and in the Q&A, about airlines' reluctance to build up inventory. Have you considered -- I know your inventory is up a little bit, and I guess that's what you have to do to serve them. But is there any way to make adjustments for a just-in-time delivery system? Or -- I guess I'm asking how you intend to handle this, going forward?

Yes, I think the -- Steve, this is Eric. The inventory is up, I think, as the result of acquired businesses, primarily. We, I think, do a very good job at inventory management.

It's a very good question, with regard to what we can do to try to offset some of that. Most of the products that we support, at least over on the PMA side, are manufactured, really, in batch quantities. They're not -- it's not really a production line.

So we have to take delivery of an economical lot quantity of material. So it's something that -- we've always had a very good support record for the industry. I wouldn't anticipate that it's going to have a significant impact on our ability to supply parts.

But it is just a phenomenon, which is going on as airlines really watch the amount of inventory that they're able to hold. We think all of this is very good, because as airlines become more cost conscious, then HEICO's solutions, I think, have greater opportunity to penetrate and pick up business. And really, that's what we've seen, whether it's in parts, repair, distribution.

Whenever airlines are focused on reducing cost, they think it's been a great opportunity for us. And also, the same thing over on the defense side. As we support the foreign militaries, and also domestic militaries, with our after-market programs, again, it's the same thing. As they focus on how to squeeze cost out of the system, whether it's inventory or direct purchase cost, I think the opportunities are very good for us.

Got it. That's great additional detail. Thanks. One other question. I know, Larry, you talked about continuing an aggressive acquisition strategy. Do you still feel that a lot of companies view HEICO as the preferred acquirer? Or do you think you might have to adjust your valuation metrics, when going after some of these companies?

No, I think that the right kind of company that we like to acquire does view us as the preferred acquirer, because of the way we run the companies. When we compete with a private equity firm, that buys and sells by the pound every three to five years, managements really find that very stressful.

So when they have a say, some input, we're always the preferred buyer. When a seller who wants to have a liquidity event wants to protect his employees, continue running -- very often, continue in the position of President, CEO of his Company, we are definitely the preferred buyer.

And very often, we tell people we cannot beat the highest price. But -- and we'll also do a transaction where we'll buy 80.1%, leave somebody with roughly 20%. So if their projection of growth is correct over the next three, five, seven years, they will benefit significantly by the growth of their own company, while at the same time pulling money out and having a liquidity event. So I don't think any of that has changed, and we continue to follow the same strategy in the acquisition.

Got it. Thanks very much. I know it's a little early, but happy New Year. I hope it will be a good one.

Thank you. To you, too.

Thank you.

Thanks.

(Operator Instructions)

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

Thanks, gentlemen. Just wanted to follow up. Last quarter, you had mentioned that your customers' fleet extension decisions for 2016 were going to be predicated on their outlook for fuel prices. And given what we've seen with the recent trend in fuel prices, is it fair to assume that those decisions have been favorable? Or is that whole process still in play?

Chris, this is Eric. I think the process is still in play. Certain airlines, such as Delta, have been very vocal and very successful in this area, talking about keeping the older equipment longer.

So I think that we've seen very, very firm belief by Delta on maintaining the older equipment. Of course, they've got the competitive and strategic advantage, with their tech ops facility in Atlanta, where they're able to keep the older equipment operating longer.

So I know that a number of the airlines out there are looking at Delta's strategy, figuring out how they can emulate it. But I think it's going to continue to reveal itself over the next 12 months.

Okay. So potentially still some upside, if we see fleet extensions?

Correct.

Okay. Also, while I have you, Eric, the industrial product line, can you just remind us, the overall impact on margins, was it a contributor? Or did it take down margins, on a mix basis? And can you confirm whether there's any remaining headwind in the first quarter, related to comp sales?

With regard to the second part of your question, no, there is no headwind any longer remaining. We finished it all out in the fourth quarter. So we don't anticipate any of that, going forward.

With regard to the impact on margins, I'll let Carlos Macau cover that.

Hey, Chris, this is Carlos. So the business that Eric was referring to was a good business for us. It was a slightly more, from an operating margin perspective, higher rate than the overall rate of the FSG. So it did have a slight impact on the margins. But to Eric's point, those sales fell off after this quarter, so we won't have that headwind, going forward.

Okay. And one question for Victor. With the space product weakness, is it fair to assume that's just related to the pretty crappy order cycle that happened this year? Or is there anything happening, with regard to either competitive shifts or technology trends, where you feel like you need to do more work?

Chris, this is Victor. I would say bingo, on the first one. It really appears to be more market related, for the most part. There are always shifts that we're dealing with, and things that are within markets. But overall, the vast preponderance of it, I think, is market related.

Okay. And by the way, the overall guidance for down ETG margins for 2016, is that -- I think you said, in your press release, it's consistent with the historical three-year trend, but obviously below what you did in 2015. Should we just view that as 2015 having been a little bit of an upside year?

This is Carlos, Chris. I think, as Victor mentioned earlier in the call, when we do our bottom-up budgeting, we look at all the subsidiaries' performance, their historical performance. And when we look at the segments, the margin that we're projecting for FY16 is consistent with, principally, the prior three years. And we think, from a projection standpoint, that that's a pretty conservative way to look at it.

And obviously, we hope to do better.

That margin is contingent upon how acquisitive we are, and how much intangible amortization we pick up along the way. But for right now, using -- I think 23.5% is what we've projected for the group, I think is a fair way to look at it. And that really has been about -- from a consistency standpoint, about what ETG has thrown, on a GAAP basis, for at least the last three years.

Mention the amortization.

Yes. And to Larry's point earlier, in the ETG in particular, there's about a 4% headwind on the margin, relative to amortization. So the true cash margin is much higher.

Got you. All right. Thanks, guys.

Thanks, Chris.

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

Hi, good morning.

Good morning, Ken.

First, Eric, just wanted to ask you -- or for Victor. As you look at acquisitions now, but specifically within FSG, has the -- maybe some of the structural changes within the PMA market, or your parts markets, maybe had an impact on your preference for more distribution or repair assets? Is the first part of the question.

And then the second part, I know, obviously, you've done some more internationally, which seems to be bringing some benefits, as well. Is that perhaps a screen, now, with which you're looking at acquisitions, maybe with a little bit more -- a little higher priority, I guess, is how I think about it?

With regard to acquisitions, we're, as you know, very active both in the United States, as well as internationally. We're very pleased with our international acquisitions, and I think we've developed a very good ability to work with those companies. We've got some great partners, and I think that that will continue to be an opportunity for us.

With regard to PMA versus repair or distribution, again, I think what the airlines are looking for is reducing their total cost of ownership, reducing their total costs. And whether we sell a product as a direct PMA, or we embody it in a repair, or we're able to structure something with a distribution deal, I think that they're all very complementary. And things are getting very fuzzy between our PMA and our repair, because there are all sorts of products which perhaps, in the past, we would have sold as PMA, and now we're selling as repairs. Because sometimes, you're able to salvage part of a unit, and have the cost of the repair be lower than the cost of making a brand-new part. So the two really go hand in hand.

And our -- as you know, our repair business we believe, is the largest independent component of repair operation in the world. And when we say independent, we're talking about non-OEM, non-airline affiliated component repair businesses.

So we continue to focus in those areas. We're active in the acquisitions in all of those areas, and I think that will just continue to grow.

Okay. That's helpful. And then if I could, Eric, just on the comments around inventory levels and structural changes at the airlines, in terms of how they're managing their spend across the airlines, but specifically as it impacts your business. Is this a -- do you get a sense that we are early in the process? Or do you get a sense that there's -- as some of the major US airlines perhaps continue down this path, that that's -- we get to a steady state in the fairly near future? What's your thinking about the process here, and the evolution of the airline efficiency push, I guess, is how I'd put it?

Yes, it's a good question. I'd say we're probably two-thirds through the process. I think the airlines are -- have developed their plans and procedures. They're implementing that right now.

I think that, to a certain extent, we've helped them along those lines, because we've been able to hold inventory, and be able to support them as they need it. But I think we're really pretty much through that process, at this point.

Okay. Great. That's helpful.

And then finally, Victor, there's been a lot of discussion around margins within ETG, and the guidance. I guess my question would be, that's been a segment that, because of mix, and obviously some of your end markets, you've seen maybe a little more volatility in the margin recently.

Do you get a sense that we start to see a little more consistency across the quarters in 2016? Or still relatively lumpy with just what you're seeing from the markets right now?

Look, we'd like it to be more even. But I would feel more comfortable guiding you to some lumpiness for now, and then we'll see how it goes.

Okay. That's great. Thank you very much.

You're welcome.

Thank you.

Your next question comes from the line of George Godfrey of C.L. King.

Thank you. Good morning, gentlemen. Just wanted to focus on the cash flow statement for just one minute. The $111 million you spent on acquisitions in this Q4, is it fair to say that represents about $32 million in annualized revenue? Or is that number higher or lower than that?

Annualized revenue?

Annualized, yes.

That's pretty close, George.

That's pretty -- okay. And then secondly, CapEx going up to $30 million this year, versus the range of $15 million to $18 million over the last four years. The incremental $12 million, do you have a targeted plan where that $12 million is going? Or is it going to go across the business as a whole?

It's going to go across the business as a whole. We do have certain unique uses for some facility expansion. We're actually investing in our foreign acquisition, to expand that, which is a lower cost manufacturing environment, and a very favorable business environment, and a very favorable tax environment.

So we do have target areas where we're spending. The Board approves a wish list budget, and then we have to make a judgment as to what we think the guys will spend. As we've talked about in the past, our subsidiaries, and the business unit leaders who run them, are very entrepreneurial and very frugal on their spend.

So we started out last year, if you recall, we thought we'd spend around $25 million, and look, we did $18 million. So I think our best estimate right now is around $30 million. There is targeted spend, it is very detailed by line item, and we'll see you how the year flushes out. But as of this moment, that's our best projection.

Great. Thank you for the -- thank you.

(Operator Instructions)

And there are no further questions registered in queue.

This is Larry Mendelson again. I want to thank everybody on this call for their interest in HEICO. The management remains available to you. If you have further questions, or want information, please call us.

And otherwise, we wish you a very, very happy, healthy, wonderful holiday season and new year. And we look forward to speaking to you again, probably the mid towards the end of February, when we'll have our Q1 2016 conference call. So this is -- we're ending the call, and again, thank you very much.

Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.