HEICO Corp (HEI.A) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the FY16 second-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 costs to complete contracts; governmental and regulatory demands; export policies and restrictions, reductions in defense, space, or homeland security spending by US and/or foreign customers; or competition from existing and new competitors which could reduce our sales; 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 and 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-K. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise except to the extent required by applicable law.

Thank you. I would now like to turn the conference over to Chairman of the Board and the CEO, Mr. Laurans Mendelson. Please go ahead, sir.

Thank you, and good morning to everyone on the call. We thank you for joining us, and we welcome you to this HEICO second-quarter FY16 earnings announcement teleconference. I'm Larry Mendelson; I'm Chairman and CEO of HEICO Corporation. And this morning I'm joined here 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 record second-quarter operating results in detail, I'd like to take a few minutes to summarize the quarterly highlights. And just before I do that, I want to thank all of the team members at HEICO for putting out an extraordinary performance in the first half and particularly the second quarter of FY16. Everyone -- shareholders, Management, Directors -- appreciate this extraordinary effort and we have an extremely high regard for this team. Thank you very much.

Our consolidated second-quarter net sales and net income represent record quarterly results, driven principally by record net sales at both operating segments, and record operating income at ETG. Both the consolidated net sales and operating income in the second quarter of FY16 increased 20% over the second quarter FY15. Consolidated net income per diluted share increased 17% to $0.57 in the second quarter of FY16, up from $0.49 in the second quarter of FY15. The ETG group set a quarterly net sales record in the second quarter in FY16, improving 46% over the second quarter of FY15. The increase reflects net sales contributed by our FY16 and FY15 acquisitions, as well as strong organic growth of 12%. The Flight Support Group set quarterly net sales record in the second quarter of FY16, improving 9% over the second quarter FY15. This increase reflects net sales contributed by our FY15 acquisitions, as well as organic growth of 4%.

Cash flow provided by operating activities and operating income was very strong, increasing 58% to $102.7 million in the first six months of FY16, and that was up from $64.8 million in the first six months of FY15. As of April 30, 2016, the Company's net debt to shareholders' equity was 53.8%, with net debt of approximately $526 million.

I would now like to introduce Eric Mendelson, Co-President of HEICO and President of our Flight Support Group, and he will discuss the results of the Flight Support Group.

Thank you.

The Flight Support Group's net sales increased 9% to a record $220.3 million in the second quarter of FY16, up from $202.8 million in the second quarter of FY15; and increased 10% to $424.9 million in the first six months of FY16, up from $384.8 million in the first six months of FY15. The increase in the second quarter and the first six months of FY16 mostly reflects net sales contributed by our FY15 acquisitions, which continue to perform well, and organic growth of 4% and 3% respectively.

The organic growth in the second quarter and first six months and FY16 is principally attributed to increased demand and new product offerings within our aftermarket replacement parts and specialty product lines. Additionally, these increases were partially offset by lower net sales from our repair and overhaul parts and services product line, principally resulting from softness in demand from our South American market. Excluding our repair and overhaul parts and service product line, the Flight Support Group experienced organic revenue growth of 7% and 6% in the second quarter and first six months of FY16 respectively.

The Flight Support Group's operating income increased 10% to $41.3 million in the second quarter of FY16, up from $37.5 million in the second quarter of FY16 [sic], and increased 13% to $76.8 million in the first six months of FY16, up from $68.2 million in the first six months of FY15. The increase in the second quarter and first six months of FY16 mainly resulted from the previously mentioned net sales growth and the gross profit margin impact from favorable net sales volumes and product mix within our aftermarket replacement parts and specialty products product lines. These increases were partially offset by the impact from the previously mentioned decrease in net sales within the repair and overhaul parts and services product line, changes in the estimated fair value of accrued contingent consideration associated with the prior year acquisition, and higher performance-based compensation expense. Additionally, the first six months of FY16 reflects an increase in amortization expense of acquired and tangible assets.

The Flight Support Group's operating margin increased to 18.8% in the second quarter of FY16, up from 18.5% in the second quarter of FY15, and increased to 18.1% in the first six months of FY16, up from 17.7% in the first six months of FY15. The increase in the second quarter and first six months of FY16 principally reflects the previously mentioned improved gross profit margin, partially offset by the changes in the estimated fair value of accrued contingent consideration and higher performance-based compensation expense. Additionally, the first six months of FY16 reflects the previously mentioned increase in amortization expense of acquired intangible assets.

With respect to remainder of FY16, we continue to estimate the Flight Support Group's full-year net sales growth to be between 8% to 10%, with organic growth in the mid-single digits, and the full-year Flight Support Group operating margin to approximate that of FY15.

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

Thank you, Eric.

The Electronic Technologies Group's net sales increased 46% to a record $132.6 million in the second quarter of FY16, up from $91 million in the second quarter of FY15; and increased 31% to $236.7 million in the first six months of FY16, up from $180.2 million in the first six months of FY15. The increase in the second quarter and first six months of FY16 reflects net sales contributed by our FY16 and FY15 acquisitions, which continue to perform well, and organic growth of 12% and 8% respectively. The organic growth in the second quarter and first six months of FY16 mainly resulted from increased demand for certain defense and space products.

The Electronic Technologies Group's operating income increased 50% to a record $33.4 million in the second quarter FY16, up from $22.2 million in the second quarter FY15; and increased 34% to $55.7 million in the first six months of FY16, up from $41.6 million in the first six months of FY15. The increase in the second quarter and first six months of FY16 came mostly from previously mentioned net sales growth and favorable product mix for certain defense and space products, partially offset by an increase in amortization expense of acquired intangible assets and higher performance-based compensation. Additionally, the first six months of FY16 reflects $3.1 million in non-recurring acquisition costs associated with the Robertson acquisition.

The Electronic Technology Group's operating margin improved to 25.2% in the second quarter of FY16, up from 24.4% in the second quarter of FY15; and improved to 23.5% in the first six months of FY16, up from 23.1% in the first six months of FY15. The increase in the second quarter and first six months of FY16 was mainly driven by previously mentioned net sales growth and favorable product mix, partially offset by the increase in amortization expense of acquired intangible assets, and higher performance-based compensation expense. Additionally, the first six months of FY16 reflects a 1.3% reduction to our operating margin as a result of the non-recurring Robertson transaction expenses.

With respect to the remainder of FY16, we are increasing our estimate for the Electronic Technologies Group's full-year net sales growth to be between 29% and 32%, up from 27% to 30%, with organic growth in the mid-single digits. We continue to estimate full-year operating margin to approximate 24%, which I note is very strong, because if you look at the true operating margin of these businesses before amortization of intangible expenses, which typically consume about 400-plus basis points of our margin, you'll see that the operating level of these businesses on their own is actually closer to 28%. So we're very proud and pleased with the performance out of our businesses.

I turn the call back over to Larry Mendelson.

Thank you, Victor and Eric.

Moving on to diluted earnings per share. Consolidated net income per diluted share increased 16% to $0.57 in the second quarter of FY16, and that was up from $0.49 in the second quarter of FY15; and increased 14% to $1.03 in the first six months of FY16 -- and again, that was up from $0.90 in the first six months of FY15. As previously mentioned, one-time non-recurring acquisition costs totaling $3.1 million were incurred in connection with a first-quarter FY16 acquisition. These acquisition costs reduced our consolidated net income per diluted share by $0.03 in the first six months of FY16.

Depreciation and amortization expense totaled $15.3 million and $12.2 million in the second quarter of FY16 and FY15 respectively, and totaled $29.2 million and $23.1 million in the first six months of FY16 and FY15. The increase in the second quarter and first six months of FY16 principally reflects the incremental impact of higher amortization expenses of acquired intangible assets attributable to our FY15 and FY16 acquisitions. Research and development expense increased 8% to $11 million in the second quarter of FY16, and that was up from $10.1 million in the second quarter of FY15; and increased 3% to $20 million in the first six months of FY16 -- again, up from $19.4 million in the first six months of FY15.

Significant, ongoing new product development efforts are continuing at both Flight Support and Electronic Technologies as we continue to invest approximately 3% to 4% of each sales dollar into new product development. Our effective strategy for the last 26 years has been to reinvest a portion of our earnings into the development of new products and services that we can offer at lower cost to our customers, which in turn facilitates market share growth sufficient to meet our growth goals.

Moving on now to SG&A expenses. They totaled $67.2 million in the second quarter of FY16; that was up from $49.7 million in the second quarter of FY15; and totaled $126.8 million in the first six months of FY16, up from $97.1 million in the first six months of FY15. The increase in second quarter and first six months of FY16 principally reflects the impact from FY16 and FY15 acquisitions, foreign currency translation adjustments on borrowings denominated in euros under our revolving credit facility -- that's the euro facility, higher performance-based compensation expense, and changes in the estimated fair value of contingent consideration associated with the prior-year acquisition. In addition, the first six months of FY16 reflects the $3.1 million in acquisition costs which I mentioned earlier.

SG&A expenses as a percentage of net sales were 19.2% in the second-quarter FY16, up from 17.1% in the second quarter FY15, 19.3% in the first six months of FY16, and that was up from 17.4% in the first six months of FY15. The increase in second quarter and first six months FY16 principally reflects the impact from previously mentioned foreign-currency translation adjustments on borrowings denominated in euros under our revolving credit facility, higher performance-based compensation expense, changes in estimated fair value of contingent consideration associated with the prior-year acquisition. And additionally, the first six months of 2016 reflects a 0.5% impact from the non-recurring acquisition costs -- that's that $3.1 million.

Our interest expense did increase to $2.3 million in the second quarter FY16 from $1.1 million in the second quarter of FY15; and increased to $3.9 million in the first six months of FY16, up from $2.3 million in the first six months of FY15. The increase in the second quarter and first six months of FY16 was principally due to higher weighted average balances outstanding under our revolving credit facility, and that was associated with the FY15 and FY16 acquisitions. Other income in the second quarter and first six months was not significant, and I'm not going to comment on it.

Income taxes: our effective tax rate in the second quarter of FY16 increased to 32.8%, up from 30% in the second quarter FY15. The increase principally reflects the benefit from a prior-year tax return amendment recognized in the second quarter of FY15, and that was for additional foreign tax credits related to R&D activities at one of our foreign subsidiaries. Our effective tax rate in the first six months of FY16 increased to 31.1%, up from 29.8% in the first six months of FY15. The increase principally reflects the aforementioned benefit of additional foreign tax credit, related to that prior-year tax return amendment which we recognized in the first six months of FY15. In addition, the effective tax rate in the first six months of FY15 reflects the favorable impact of higher tax-exempt unrealized gains and the cash surrender values of life insurance policies related to the HEICO Corporation leadership compensation plan.

Net income attributable to non-controlling interest was $5.1 million in the second quarter, and $9.7 million in the first six months of FY16. And that's comparable to the $5.4 million and the $9.9 million reported in the second quarter and first six months of FY15. For the full FY16 year, we continue to estimate a combined effective tax rate and non-controlling interest rate of 39% to 40% of pre-tax income.

Moving on to our balance sheet and cash flow. Our financial position and forecasted cash flow remain very strong. As we previously discussed, cash flow provided by operating activities was very strong -- increased 58% to $102.7 million in the first six months of FY16, and that represented 147% of net income, and that's compared to $64.8 million in the first six months of FY15. And one thing I want to point out here: often HEICO, when we speak to investors, they say that we love HEICO, we love everything about it, but the valuation is very high. It's a rich price. Incidentally, that's been the case for many, many years. And some investors say to us that they don't think HEICO is richly priced. And they say based on the cash flow results, HEICO is pretty much in line, and then some investors feel it's actually priced lower than comparable companies that do not generate as much cash as HEICO does. As you know, we focus number one on cash flow, and number two on earnings per share. They kind of go hand-in-hand, but cash flow to us is the name of the game, and that's how we grow our business.

Our working capital ratio is a strong 3.4 times as of April 30, 2016, and that was up from 3 at October 31, 2015. DSOs, days sales outstanding of receivables, improved to 46 days as of April 30, 2016, and that was down from 51 days on October 31, 2015. And of course, as usual, we continue to monitor all receivable collection efforts in order to limit our credit exposure. As most investors know, we suffer very few losses on accounts receivable.

No one customer accounted for more than 10% of net sales, and our top five customers represented approximately 21% and 18% of consolidated net sales in the second quarters of FY16 and FY15. As expected, our inventory turnover rate increased due to the impact of a January 2016 acquisition, and that turnover rate was 125 days for the period ending April 30, 2016; and it was up from 116 days for the period ending April 30, 2015. If we exclude the impact of this acquisition, the inventory rate turnover was 117 days and 116 days in the first months of FY16 and FY15 respectively.

Our net debt to shareholders equity ratio was 53.8% as of April 30, 2016. With net debt -- and that means total debt less cash and cash equivalents -- of $526.1 million, and that was principally incurred to fund acquisitions in FY16 and FY15. We have no significant debt maturities until FY19, and we plan to utilize our financial flexibility to aggressively pursue high-quality acquisition opportunities which should accelerate growth and, of course, maximize shareholder returns.

Now the outlook: as we look ahead to the remainder of FY16, we anticipate organic growth within our aftermarket replacement parts and specialty products lines that serve the commercial aviation markets, moderated by softer demand for certain component repairs and overhauls. We expect organic growth within ETG, reflecting increased demand for the majority of our products. During the remainder of FY16, we plan to continue our focus on new product development, further market penetration, and executing our acquisition strategies and maintaining our financial strength. Based upon our current economic visibility, we are increasing our estimated consolidated FY16 year-over-year growth in net sales to between 15% and 17%, and growth in net income to 12% to 14%. And this is up from prior growth estimates in sales -- net sales -- of 14% to 16% and the growth in net income of 10% to 13%. Additionally, we anticipate our consolidated operating margin to approximate 18.5% to 19%, depreciation and amortization expense of approximately $62 million, CapEx approximately $32 million, and cash flow from operations to approximate $220 million.

In closing, we will continue to focus on intermediate and long-term growth strategies with an emphasis on, again, cash generation and acquiring profitable businesses at fair prices.

That is the extent of my prepared -- our prepared -- remarks, and I would now like to open the floor for questions from all the callers on this call.

(Operator Instructions)

Michael Ciarmoli, KeyBanc Capital Markets.

This is actually Kevin on for Mike. Nice quarter.

Wanted to start on the FSG side. Just wondering if you guys could elaborate a little bit more on the increased demand you saw in the quarter. Anything specific in terms of region, carriers or certain aircraft or part families that were particularly strong in the quarter?

Hello. This is Eric. I will take the question, good morning.

I wouldn't say that there was any particular area of strength. I think that all of our products did quite nicely. In reviewing the sales performance with our sales executives, I think that the demand for the products has been very broad based with the customers wanting us to develop additional parts for them so they could save money and have an additional source of supply. So no, I would not say that it was in any one particular area.

Okay. That's helpful. And then just on the margins in FSG, Eric, it sounds like mix was a factor there given that MRO was down a bit. Anything else going on in the margins? It saw a pretty sharp increase sequentially.

No. I would say it's just part of our natural mix. Sometimes we have a little bit more of lower profit margins, sometimes we have a little less of that business.

I would just say that it's mix. I'm very happy with the continued focus at all of our businesses on cash flow generation. So I wouldn't say that it was anything really out of the ordinary. Thanks, Kevin.

Okay. We continue to hear that there's strength in the aftermarket, particularly on the CFM56 and the v2500. Can you talk a little bit, Eric, maybe about how you guys are positioned on those programs and what you're seeing there?

The answer is yes, I will talk a little bit about it. We have to be careful about specific platforms, because of course our competitors are very interested in what we're doing.

But I think as everybody knows, the majority of our sales are over half of our sales in the PMA parts area our components. So it's not engines, its fuel, hydraulics, pneumatic, electro mechanical, wheels and brakes structures, all sorts of various parts for the aircraft.

We continue to be active. Over on the engine side, I'd say that roughly over the last 20 years, there's been increasing competition in the engine side. Of course, I think most people are familiar that the European Commission is looking into some of I think what they believe are anti-competitive practices of certain suppliers.

But there's no question that the engine business has been a tougher business. But we still continue to be active in it. We've got customers who want us to develop parts, who want us to support them.

But it definitely has become more competitive as certain manufacturers have really, in my personal opinion, used a lot of anti-competitive practices to try to squeeze competition out of the market. So it continues to be something that we're going after, but again, most of our business is over on the component site.

Okay, thanks. And then just last one for me, I guess shifting to ETG may be for Victor here.

I saw the highest organic growth since early 2011. Any specific thoughts you can provide on the DOD budget environment or programs that are specifically driving growth there? And then maybe also your thoughts on how sustainable you think these levels are? What do you guys have in terms of backlog and visibility of the ETG side? Thanks.

Kevin, sure, this is Victor. In answer to your question on the DOD budget, truthfully, we really don't have much visibility beyond what everybody else has. I think we get the same information that the public receives, which is that budgets are expected to grow, that there has been some improvement in procurement, and that is our expectation going forward.

The growth in our defense operations, sales, were across multiple product lines. Not every one of them, not every business, but it was across many different ones. Including short cycle and long cycle businesses, which to us is pretty healthy. We like to see that.

And this I think is consistent with the expectations that we've talked about now, probably you've heard us talking about this for the last year or year and a half even. I'm trying to remember back to some of those conference calls.

So we feel that the budget should be healthy. I'm not looking for massive increases in the budgets. I don't think we're looking back at the 2003, 2002 defense budget increase levels.

And then of course foreign defense is contributing to that as well. And that's an important part of our business, whether some of it's directly to foreign contractors or through the (inaudible) that are based here in the US.

And in terms of what we're expecting going forward, you talked about that organic growth rate. It does move around over time, and so the guidance that we've given in the press releases and I discussed in our call in the comments earlier, are still operative. And we hope to achieve these growth rates.

And I know we've done it often in the past, but we'd rather commit to something lower and if we do better that's great. So we're going to hold into the historic growth rates that we've said, which is the mid to low single-digits and hopefully can do better than that. But I would count on our guidance, and that's where we're putting it.

Great. Thanks for the detail. Appreciate it.

You're welcome.

Greg Konrad, Jefferies.

Great quarter. Just to stick with ETG, it appeared that Robertson contribution was maybe a little bit stronger than we had modeled. Can you maybe size that contribution, and is there any seasonality into the business?

Unfortunately, this is Victor, I can't size the revenue contribution from Robertson itself, but I can answer the question on seasonality. And there is no particular seasonality to this business, but it does tend to batch. Meaning that it can happen that one quarter will have a disproportionate share of revenue versus another quarter, and that's because these are high-dollar items and they tend to ship in large batches as required by our customers.

That's the sort of thing that can happen over time. I don't know that was the case in this quarter, but I would expect that to happen but even out over the course of the year. It should even out over the course of a typical year.

Thanks. And then also on the commercial side, we've seen the OEs maybe look for opportunities to take costs out of the supply chain, whether it be Boeing with partnering for success or other OEs. Being a lower cost producer, have you seen any benefit to these shifts in the supply chain?

No. We haven't seen really any significant shifts right now. Other than the customers are very knowledgeable about what's going on, and they recognize that there's not a lot of competition in the market. I think they really value us being in the market.

So I think whenever a potential competitor drops out, it just makes their interest in us even greater. Because they need to preserve the competition, and they like the independence of HEICO. But I can't say that I've seen anything thus far as a result of that.

Thanks. And then just last, can you size the change in the estimated fair value of accrued contingent consideration?

This is Carlos. The change in accrued contingent consideration really for the quarter and for the year, there were similar changes. About $1.5 million and about $2.5 for the six months. So for the quarter there's been $1.5 and the $2.5 million for the six months.

And that was principally due to one of our earn-out deals with a foreign subsidiary is performing much greater than we had anticipated on the front end. And we're very proud of that, happy about that. And so as they continue to outperform our expectations, we have to increase the earn-out liability that we would owe them at a point in the future.

Thank you.

Larry Solow, CJS Securities.

Just a quick follow up on the contingency liability. Did that flow through FSG or was that in the corporate line? Because I know the corporate line was also a little higher than we'd expected.

It goes through to the SG&A corporate.

So it is in the corporate line, okay. And then just -- .

Larry, some of that also includes some of FX impact. For the quarter and the year, the exchange rate of the euro against the dollar has worked against us. So there's a little bit of FX baked into those numbers.

And that's more a balance sheet than an operational I guess?

No. That actually goes through the P&L, because we're holding the euro debt on our books and we're holding the euro liability on our books which are functional currencies of dollars. So we have to take the hit through the P&L every quarter, and we're (multiple speakers).

It flows through the P&L, but it's actually a balance sheet transactional thing not a -- ?

We have the liability on the balance sheet.

Yes, exactly, okay. And then just a little more granularity on the Flight Support Group. Obviously things are going, it sounds like they're going pretty well there, not a lot of change to your outlook.

Just curious, obviously aftermarket doing a little better. It's up I think 6% this year, I think you guys were up 3% last year. And some of your competitors are noting improvement. Have you seen any sequential improvement over the last couple of quarters, year to date, or some of this growth being driven more just by your [initiators] and more new product introductions?

Larry, this is Eric. With regard to the FSG organic growth, we did see -- we did report stronger numbers in the second quarter for organic growth as compared to the first quarter. So there was acceleration there.

I think that in talking with the salespeople, we don't think that there's a lot of excess inventory in the supply chain. The customers want us to develop more parts, I think we've got a lot of good stuff consistent with what we've had in the past on the horizon. But I wouldn't say that there is any really change to our strategy or focus, but there has been definitely a pickup in the organic growth from the first quarter.

Got it. And then on the repair overhaul side, is the weakness -- is it really predominantly just from South America? Because I thought last quarter there was also just a little general sluggishness? Is that pretty much gone now and it's basically just the South American market that's hurting you?

Larry, this is Carlos. I think a couple things, one, the South American market is softer, and that's the predominate factor. There is -- we did mention in the first quarter and we saw a little bit of it in the second quarter, the average ticket price in some of our repairs is a little lower than it had been.

I do think that's the combination mostly of some of these part outs that are going on, some of the repairs that we're getting aren't as acute as they were historically. There's a little bit more green time left than the parts we're taking in, they're not as worn out. So we are seeing a little bit of a decrease in the average ticket revenue per ticket price, but not substantially, the majority of it was the South American market and those carriers down there.

Got it. Okay, great. And then just last question and I think this may have been touched upon on the last call just on CapEx. A pretty significant step up year over year, I know you had -- obviously, sales were higher, but I guess on a percentage of sales it's a little bit over 2% versus about 1.5% last couple years.

Just remind us, I think you have some initiatives for some investments at some of the newly acquired companies. Is that what's driving the CapEx higher, and should be expect that to tail off as we look out to next year?

We've got a CapEx project that contemplates some expansions. So to your point, some of that expansion is happening in those acquisitions that we made in 2015 and 2016. And so I would expect the CapEx spend to be -- I know historically we might have been a little bit under spent to our guidance, but I'm expecting this year as to be close of our guidance on the CapEx spend.

Our guides are very frugal though, so they may surprise me. But we do have some very nice plans for growth and expansion right now that are included in our budget.

Great. Excellent. Okay, I appreciate it. Thanks a lot.

Thank you, Larry.

Ken Herbert, Canaccord.

Eric, if I could, I just wanted to dig a little deeper into the repair and overhaul commentary. I can appreciate the South American impact.

Can you quantify maybe how much that business was down in the quarter? And then are you seeing any shift where maybe there's less opportunity as MRO's start to do maybe do more repair in house? Has that been at all a factor that you've faced or a headwind that you've faced?

Okay, good morning, Ken. With regard to the second part of your question, MRO's doing more in-house. I wouldn't say that there's really a trend towards that. If anything, I think there's more of a trend to send it out.

We're in a good position, so if they want to send it out we have the opportunity to take it in and turn the wrenches, if you will, ourselves. And then they -- if MRO's perform their own maintenance or airlines perform their own maintenance, then we can sell them parts in order for them to accomplish their maintenance or maybe repair some sub-assemblies to for them. So I wouldn't say that there is a significant change there.

With regard to the MRO, you asked about the drop in South American sales. I don't think that's a loss of market share, we're all familiar with what's going on in South America with commodity prices and some of the political turmoil going on. I think that our market share is very strong, and we're going to be in a good position to recover that. But in terms of breaking out specifically, I think that's hard for us to do because of competitive reasons.

Okay, no, that's helpful. I can appreciate that. So I guess on the repair and overhaul side, again, just to echo what or to clarify what mentioned that Carlos I think mentioned a few minutes ago.

You are seeing lower ticket prices as there's maybe less or more green time availability, maybe a little more surplus or other alternative material that might be lowering those overall ticket prices. As you look out for the second half of the year, do you anticipate any shift in the repair and overhaul, the MRO side of your business, or any sequential improvement we could expect in that business?

I don't think we anticipate a significant shift. I think it's probably going to be in the area that it's in now. Maybe there could be a little bit of improvement, but as you know, we don't like to forecast something like that that we really don't control.

We feel confident that when the airlines need the components that are going to send them to us, but honestly, until we tear them down, and know what they need, it's very difficult. So I would think the bias maybe would be a little bit to the upside, but I wouldn't want to overstate that or overplay that because we just don't have enough data points right now.

Okay, that's helpful. And if I could, Victor, on Robertson, really nice quarter. Is there anything in particular you could point to around the growth for that business that you saw in the quarter?

Maybe quantify -- maybe you don't want to quantify Robertson specifically, the contribution or the growth there. But I know there's been a lot of talk lately about the FAA and the NTSB looking at crash resistant fuel systems on civil helicopters, at least here in the United States. Are you seeing any pull there yet, or could that be any upside opportunity for you to the extent to which you see any activity on the civil side?

Thank you yes. This is Victor. It's a good question.

The answer is at this point, it's upside to us. As you know, it wasn't the driver for why we bought the business but I expect that to be upside for us. We haven't really seen much out of it at this point, and I think it's probably something that's a little further out than we are now just in terms of development, certification and government push.

In terms of Robertson's business overall, while you're correct, I can't break out the revenue from it and exactly of course talk about specific customers. I can say that their success was broad based, that it was in the areas we expected when we made the acquisition, they are doing what we anticipated, maybe even a little bit better than we anticipated.

And so far, it's going very nicely. As I've said before, I think we have an excellent team there and the starting with an excellent CEO and cascading through the entire organization.

Okay, that's helpful.

(Multiple speakers) with them at different events and trade shows, and we continue to be impressed.

That's great. And then broadly within ETG, any other color you could provide on -- I know obviously space and defense seemed to be good in the quarter and you said it was broad based. Is there any particular programs you would point to, regions or geographies you might point to where you're maybe seeing a little better strength than you thought, or how should we think about that with any additional detail you can provide?

It's a good question. I think is as always the case, it's not every space line for us or every space business that moves was moving ahead, the same as I mentioned with our defense business. Right, that it's overall in that direction.

And I would say that we've had -- there's no one particular region, it, again, was broad based. Not a particular region where the revenue was coming from that drove it. I would expect that commercial space growth rate for us may moderate a little bit as the year wears on. It's still good, but overall I would expect some moderation in that. And I think that maybe is reflected in the guidance that we've given.

Great. Well thank you very much, and really nice quarter, guys.

Thank you very much.

George Godfrey, C.L. King.

I wanted to follow up just to dig in a little bit more on the ETG side. The organic growth rate accelerating from 4% up to 12% this quarter, that's a pretty substantial jump in just one quarter. Would you say that -- and I heard the comments about broad based, is that reflective of the batch nature that you talked about that there were more programs are simultaneously hitting a sweet spot this quarter?

It's a result -- George, this is Victor by the way. It's a result of a few things. And by the way, it's not historically if we go back a number of years, it hasn't so much jumped around recently but we have seen this kind of thing.

In the past, we've seen levels jump up and will have a very high growth rate in the quarter, and we may have a flat or even slightly down in another quarter. So I would expect that kind of thing and those kinds of movements to continue into the future.

It was a result really of a number of factors. I don't think there's any single one that I would particularly call out. I think you look at prior year, we look at the demand for the products, and they all factor into it.

And then I wouldn't say anything is necessarily particularly batched into the quarter, although we run this business to maximize income. So we don't do anything to smooth it out. That's just not our style, and we tell our businesses, you ship when you believe you should be shipping according to your contracts and when you're ready and quality and so on all layer into that.

And that too has an effect on the business, because we're not trying to smooth it out. We're often producing and it will be produced in a level loaded way. But again, if the customers are taking it later on, they don't have that batch affect and they will say look, we wanted certain batches. So we produce as efficiently as we can.

Understood. And then the gross margin up 200 basis points year over year, a really nice impact there. Is that principally Robertson having a higher profitability structure?

Robertson is part of the mix in that and of course an important part of the mix in that, but we've got a number of good businesses in there as well. And some other acquisitions we've made along the way in the last few years are pretty strong margin too.

And just speaking of the acquisitions, a $3.1 million expense that you called out for the first six months. Do you have an estimate on how that breaks down between the Q1 and Q2? Would a 50-50 mix be a reasonable place to start?

I'll let Carlos answer, but I think it's all Q1.

George, this is Carlos. We incurred that expense all in Q1 when we closed on the Robertson deal, and that was a fee paid to the investment bankers.

Okay. So no recurring or one-time expenses here related to that in Q2?

No.

Okay. And then last question, just to go that MRO businesses. Is that the maintenance repair and overhaul, do expect that to continue to continue to trend down as we move through the next four to six quarters? And I'm just wondering when the comparisons get such that the full flight support growth organic rate of 4% matches the backed out MRO growth of 7%, do we see that in 2017?

George, this is Eric. I don't believe that the repair and overhaul sales are going to be trending down going forward. I think it's we're always very conservative on predicting and calling a turn. But as I mentioned in the prior question, I think that we probably have more exposure, if you will, to the upside than the downside there.

So I think that will -- we're, as I said, better exposed to the upside. But having said that with regard to when that rolls off, I would say if the R&O business got a little weaker basically in our first quarter, so that would be the period starting November.

But again, I think we're still performing extremely well in that area. We speak to other firms in the space, and I think that they're much more adversely impacted than we are. So I'm optimistic that we're going to do quite well in that space.

George, I may want to add to that if we look at our repair and overhaul business, all of our facilities for the most part are doing very well. We do have -- it is really targeted to the South American and to some degree Latin American marketplace where it's a little weaker. And is Eric mentioned earlier, that's been the anomaly that we experienced in the first quarter and the second quarter.

And I think we may see that marketplace continue to be soft into Q3 is our expectation, but we don't think that it's a perpetual problem. Because again, they're going to have to fly their fleet and they're going to need these things repaired. So we believe we saw the market share and we're still in that market, and we'll get that business when economic conditions improve in that part of the world.

Understood. Nice quarter. Thank you very much for taking my questions, gentlemen.

Thank you, George.

Robert Spingarn, Credit Suisse.

So I think my peers have done a good job at getting to a lot of the detailed stuff on the quarter, so I wanted to ask a couple of more strategic questions. And, Victor, if I can indulge you on ETG a little bit more. I wanted to see if you can highlight a few areas. You've got so many interesting businesses that you've acquired over time,

Are there any areas you can highlight where you have an opportunity to organically grow the catalog? In other words, I don't know, if you take Robertson and fuel controls on helicopters, does that translate into other kinds of aircraft? That's where I'm headed with this type of question.

Rob, this is Victor. It's a very good question.

Certainly in the case of Robertson, we do think that the fuel systems are applicable to other aircraft, generally rotating wing planes. And we've talked a little bit about the commercial opportunities there, but there are also expansion opportunities I think outside the US for them in rotorcraft strategically.

And I think that also applies in a number of our space businesses as well, as they've developed and continue to develop what I would call more advanced technology and in more advanced designs. And it's really what's driven a lot of the growth that we've seen over the years and some of it this year, where we've been investing -- these businesses have been investing in newer, again, more advanced designs which are higher value to their customers.

And then of course in our space business, we have that in a number of places as well. Now not all of them will succeed. And there will be different levels of success, and that what informs us on our overall growth level expectations, but those are important parts of our business.

What we're not doing is harvesting. And strategically when we acquire a business, we look at where they are in the technology spectrum for their product and how that's viewed by the customers and what the customers want. And it's very much driven by where we think the customers want to go, as opposed to necessarily where we want the customers to go.

And is there any way, Victor, to quantify when you look at the broad spectrum of ETG what percentage of your businesses have this somewhat horizontal opportunity? Is there any way to think about that?

Yes. In a rough sense, I would say it's better than half of the businesses.

Okay.

I would have to actually go through and sit down and think of each one of them, and then I'd have to distill it down to revenue. But as I think of it on a gross basis, I certainly can think of more than half off the top of my head.

Okay. That's a good answer. Eric, if I could switch over for FSG. I wanted to ask, this is a follow on to the question earlier about the supply chain and whether -- I think you've said repeatedly on this call, that your customers are asking you to find other areas where you can help them with dual sourcing product.

Have the air framers asked the same question? Have you seen any of that?

You mean the air framers asking us to develop parts for them?

For their programs where maybe they want a second source.

I appreciate your question, but I think we need to be a little bit careful in what we in how I answer that.

Okay.

I think that there will be opportunities for us in that space as they want to drive their costs down. But I think at this moment, I'm sorry, I have to defer on answering.

That's a reasonable answer, I understand why. And then just one more question, then this is more toward the quarter, Eric. But -- and I've asked this in the past, and you've talked about the organic growth. Is there any way again to talk about same-store sales on particular parts?

I'm trying to get a sense of what unit volumes are truly doing in the markets, so this is same airplane comparisons. Related to traffic growth and so on, so not penetration of a particular customer type growth or a catalog addition but just flying is up so we're seeing an equivalent increase in the utility or utilization of that part.

Yes. I would say that our organic growth comes primarily from volume, not from price. We tend to be very price friendly to our customers. However, diving in deeper on your question, of course, that organic growth is made up of a lot of things and one of them is increased market penetration and then change in volumes and all that.

I would say that volumes are a flat on the programs right now in general. I would say there more flattish. I think -- .

So you're adjusting out the catalog affects and so forth, you're really looking at one airplane versus one airplane flattish.

Yes. However, as you know, some of the older aircraft are coming out, some of the newer aircraft are increasing. So I'd really need to go back and take a look at that, but I would say it's just in terms of unit volumes they're pretty flat.

Okay. All right. Well thank you.

Thank you.

Chris Quilty, Raymond James.

I think this question was asked in a more generic sense, I'll ask it more directly. There was a article or announcement by Boeing that they're looking to pull in potentially some more of their parts business, which they view as attractive. And can you talk about, to the degree that they move in that direction, whether that benefits or hurts you in the marketplace?

Hello, Chris, this is Eric. I'm happy to answer that question. I think the opportunity exists for us in that space.

For example, if Boeing or Airbus have suppliers and they're not getting the, if you will, the pricing that they want out of those suppliers I think there is an opportunity to come to us. We're familiar with the regulatory process, and in many cases the airframer does not own the intellectual property. And as you know, that's not a barrier for us because we can develop it ourselves. So I think that could be an opportunity for us, but we'd have to see how that plays out.

Okay. Also on the space side of the business, if I think about your positioning with Sierra Microwave and other, you tend to be on more of this big geo program exposure. Are you undertaking any efforts to look at some of the new developments, new space cube sats, satellite constellations that are starting to percolate?

Absolutely. I don't know that we'll be a big player in cube sat markets so much, but certainly some of the Leo constellations draw our interest. And I would foresee at some point in time us participating to some extent.

Very good. Congratulations on the great results.

Thank you.

(Operator Instructions)

Jim Foung, Gabelli & Company.

Great quarter. It seems like the Robertson acquisition is doing quite well and meeting your expectations. I was wondering, does that give you more confidence to do -- to make acquisitions more in this order of magnitude of this size? And also you've touched upon this with some earlier response, but does this also opens up new opportunities in the defense area for you to look at acquisitions?

I think, Jim, the answer is we're very confident on making acquisitions, large acquisitions, smaller ones, and we're and opportunistic buyer. So if a large acquisition comes along, we're happy to do it.

So I guess we've always been that way, and we have confidence in our due diligence process, our ability to analyze and so forth. And as you know over the years, the acquisition program has been very good and we've made a lot of right guesses, so good acquisitions. In terms -- the second part of your question was, could you repeat that?

Yes. Robertson is more in the defense, I'm just curious if that's going to -- if you're now looking at that market as another opportunity for you to make more acquisitions with valuations still relatively inexpensive in that area?

The answer is definitely yes. And again, we've always looked in this defense market, and we've made other acquisitions before Robertson in the defense space. And we're open to make acquisition -- as long as the acquisition meets our criteria, which is high-margin, strong management, history of positive growth, and we analyze the product.

But those two are the really key, if they don't have strong management and margin, we would not be interested in it. So to answer your question, absolutely, we're wide open to acquisitions in the defense space sure.

Very good. And could you just comment on your pipeline of opportunities currently?

Well the pipeline of opportunities, there are a lot of companies listed. It goes up or down. Unfortunately, we've said this at many conferences.

We start to get into transactions, and they look great on paper, and we're told this that and the other thing, and we start to kick the tires. And we do our due diligence internally. Carlos has a financial group that really goes out and scrubs these things, and believe it or not unfortunately, we have investment bankers and sellers that tend to fabricate what's really going on.

And when we start to turn over the stones, instead of having $15 million in EBIT, they have $10 million in EBIT. And they said well why is that, and they give you a whole bunch of excuses but they still want the same price.

So we run into this more often than I would like to think that it would happen. But it happens, and we can spend a lot of time. And until the deal is closed, we don't know where it's going to wind up.

So we are looking at things, we are negotiating with people. But it's amazing how they promise you one set of results, and you go in there and you discover that it is really not the way they set it up. So then we walk.

In order to -- there's no way I can predict how many we're going to make. Last year, we made about six acquisitions during the year, this year we've made how many? Two, I think we've made two. Of course the Robertson was a large one, great acquisition.

By the way, Robertson, I just want to point out the seller, the management, there was no fluffing, no bologna, great people to deal with, great management. Very pleased, as you've heard on the call.

So we love acquisitions. And we also made a number of I can think off the top of my head -- recently, we made a defense acquisition, MMS, fantastic. The guys are super superstars. So that's what we like to do, and if we can't get that quality we would rather pass.

Well I guess the results that you show really shows the type of work you've been doing on the acquisition front. Congratulations. That's all I have. Thank you.

Thank you, Jim.

At this time, there are no further questions. I would now like to turn the floor back over to management for any additional or closing remarks.

Thank you. We 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, and we look forward to speaking to you at the end of our third quarter which should be sometime near the end of August.

So if we don't speak to you until then have a good summer, and a very good holiday weekend this weekend and we will resume late August. We can turn off now.

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