HEICO Corp (HEI.A) 2018 Q1 法說會逐字稿

Good morning. My name is Jennifer, and I will be your conference operator. At this time, I would like to welcome everyone to the Fiscal Year 2018 First Quarter Earnings Conference Call. (Operator Instructions) Certain statements in this conference call will constitute forward-looking statements, which are subject to risk, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or applied by those forward-looking statements as a result of factors, including: Lower demand for commercial air travel or airline fleet changes or airline purchase decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our cost to complete contracts, governmental and regulatory demands; export policies and restrictions; reductions in defense, base or homeland security spending by U.S. and foreign customers or competition from new competitors, which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within the outside of the aviation, defense space, medical, telecommunications and electronic industries, which could negatively impact our cost and revenues; and defense spending on budget cuts, which could reduce our defense-related revenue.

Parties listening to or reading a transcript of 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 statements, whether as a result of new information, future events or otherwise, except to the extent required applicable by law.

Thank you, ladies and gentlemen, and I will now turn the call over to Laurans Mendelson, Chairman and CEO. Please go ahead.

Thank you very much, and good morning to everyone on the call, and we thank you for joining us. We welcome you to this HEICO First Quarter Fiscal '18 Earnings Announcement Teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation, and I'm joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group; and Carlos Macau, our Executive Vice President and CFO.

Now before reviewing operating results in detail, I'd like to take a moment to thank all of HEICO's talented, dedicated and loyal team members, who again, were responsible for our excellent results. I am and the board is very, very proud of this talented, dedicated and loyal group who consistently, every day, turn out the highest-quality products and services for our customers and make HEICO the great company that it is.

I'll take a few moments to summarize the highlights of our first quarter results. Consolidated net income increased 59% to a record $65.2 million or $0.60 per diluted share in the first quarter of fiscal '18, and that was up from $40.9 million or $0.38 per diluted share in the first quarter of fiscal '17. Consolidated operating income increased 23% to $79.6 million in the first quarter of fiscal '18 and that too was up from $64.6 million in the first quarter of fiscal '17. Our consolidated operating margin improved to 19.7% in the first quarter of fiscal '18, and that was up from 18.8% in the first quarter of fiscal '17. As a result of the passing of the U.S. tax reform in the company's first quarter of fiscal '18, our effective tax rate in the first quarter was 4.7%, which was down from 26.6% in the first quarter fiscal '17. Our net income was favorably impacted by approximately $16.5 million or $0.15 per diluted earnings per share as a result of the lower corporate tax rate, including approximately $11.9 million or $0.11 per diluted earnings per share as the result of a onetime tax benefit, principally due to remeasurement of our net deferred tax liabilities.

Consolidated net sales increased 18% to $404.4 million in the first quarter of fiscal '18 and that was up from $343.4 million in the first quarter of '17. Our ETG group, net sales and operating income in the first quarter fiscal '18 are up 23% and 49%, respectively, over the first quarter of fiscal '17. I'm going to repeat that, operating income up 49%. Truly amazing to me. The increases principally reflect the contributions from our profitable fiscal '17 and '18 acquisitions, plus 6% organic growth and improved profit margin for certain defense products.

Our Flight Support Group, net sales and operating income in the first quarter of fiscal '18 are up 15% and 11%, respectively, over the first quarter of fiscal '17. Those increases principally reflect contributions from our recent acquisitions and 6% organic growth in our commercial aftermarket business. Cash flow provided by operating activities remain strong, totaling $45 million in the first quarter of fiscal '18. Net debt, which is total debt, less cash and equivalents, was $603.3 million as of January 31, '18, compared to shareholders' equity decreased to 45% as of January 31, '18, and that was down from 50% as of October 31, '17.

Our net debt to EBITDA ratio was 1.54x as of January 31, '18, compared to 1.67x as of October 31 '17. Now during fiscal '18, we've successfully completed 2 acquisitions, and we have completed 5 acquisitions over the past year. We have no significant debt maturities until fiscal 2023, and we plan to utilize our financial flexibility to aggressively pursue high-quality acquisitions to accelerate growth and maximize shareholder returns.

In November '17, we acquired all the outstanding stock of Interface Displays & Controls. IDC designs and manufactures electronic products for aviation, marine, military fighting vehicles and embedded computing markets. This acquisition expands our product offerings to existing customers and allows us to better address market needs. IDC is part of our Radiant Power subsidiary in our ETG group. Earlier this week, we announced the acquisition of 85% of the business and assets of Sensor Technology Engineering, which we call Sensor Tech. Sensor Tech designs, manufactures sophisticated nuclear radiation detectors for law enforcement, homeland security and military application. Sensor Tech's 2 founders own the remaining 15% of the business and will continue to manage it in their existing roles. Sensor Tech is part of our Santa Barbara Infrared subsidiary, which is also in our ETG group. We expect that both of these acquisitions will be accretive to earnings within the first 12 months following closing.

In December '17, we declared a 5-for-4 stock split, which reflects the Board of Directors' continued confidence in the strategic trajectory and growth of the business. The additional shares were distributed in January 2018. And this marks HEICO's second 5-for-4 stock split made within the past year and the 16th stock dividend or split since 1995. All applicable share and per share information has been retroactively adjusted to reflect the 5-for-4 stock splits distributed at April '17 and January '18. In January '18, we paid an increased regular semiannual cash dividend of $0.07 per share and that represented our 79th consecutive semiannual cash dividend and also a 9% increase over the prior semiannual per share amount. And a cumulative increase of 22% in the cash dividend since January 2017.

At this time, I'd like to introduce Eric Mendelson who is 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 15% to $254.7 million in the first quarter of fiscal '18, up from $220.9 million in the first quarter of fiscal '17. Excluding a small net sales decrease in our specialty product line for certain defense components, the Flight Support Group experienced 6% organic growth in the first quarter of fiscal 2018, principally in our commercial aftermarket replacement parts and services. On a consolidated basis, the net sales increased in the Flight Support Group for the first quarter of fiscal '18, is attributable to the impact from our recent profitable acquisitions as well as overall organic growth of 4%. The organic growth in the Flight Support Group mainly reflects higher demand and new product offerings within our aftermarket replacement parts as well as repair and overhaul parts and services product line, partially offset by the previously mentioned net sales decrease within our specialty products product line.

The Flight Support Group's operating income increased 11% to $45.9 million in the first quarter of fiscal '18, up from $41.4 million in the first quarter of fiscal '17. The increase principally reflects the previously mentioned net sales growth, partially offset by higher performance-based compensation expense and an increase in intangible asset amortization expense, mainly resulting from the fiscal '17 acquisitions.

The Flight Support Group's operating margin was 18% and 18.7% in the first quarters of fiscal '18 and '17, respectively. The decrease in the first quarter of fiscal '18 reflects the previously mentioned higher performance-based compensation expense and increase in intangible asset amortization expense. With result to the remainder of fiscal '18, we continue to estimate full year net sales growth of approximately 10% over the prior year and the full year Flight Support Group's operating margin to approximate 18% to 18.5%. Further, we estimate that approximately half our fiscal '18 net sales growth will be generated organically. These estimates exclude additional acquired businesses, if any.

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 23% to $155.7 million in the first quarter of fiscal '18, up from $126.2 million in the first quarter of fiscal '17. The net sales increase resulted from the contributions by our profitable fiscal '17 and '18 acquisitions and 6% organic growth, principally from increased demand for our space and defense products.

The Electronic Technologies Group's operating income increased 49% to $43.2 million in the first quarter of fiscal '18, up from $29.1 million in the first quarter of fiscal '17. The increase principally reflects the previously mentioned net sales growth and an improved gross margin impact, mainly attributed to higher net sales and a more favorable product mix for certain defense products. The Electronic Technologies Group's operating margin improved to 27.8% in the first quarter of fiscal '18, up from 23.1% in the first quarter of fiscal '17. The increase is principally attributed to the previously mentioned improved gross profit margin. With respect to the remainder of fiscal '18, we now estimate full year net sales growth of approximately 15% to 17% over the prior year, up from the prior estimate of 12%, and anticipate the full year Electronic Technologies Group's operating income to approximate 27% to 28%, up from the previous estimate of 27%. Further, we estimate the Electronic Technologies Group's organic net sales growth rate to be in the mid- to high single digits. These estimates include the recently announced acquisition of Sensor Tech but exclude any additional acquired businesses of course, if any.

And now, I'll turn the call back over to Larry Mendelson.

Thank you, Victor. Moving on to diluted earnings per share. Consolidated net income per diluted share increased 58% to $0.60 in the first quarter of fiscal '18, and that was up from $0.38 in the first quarter of fiscal '17. The increase in net income reflects the improved operating performance of both Flight Support and Electronic Technologies and the benefit of significant changes to U.S. tax law that were enacted at the end of December 2017, and that would include a reduction in the U.S. corporate tax rate.

Diluted earnings per share was favorably impacted by approximately $0.15 as a result of lower federal tax rate and is inclusive of an $0.11 onetime benefit, principally from the remeasurement of our net deferred tax liabilities. As I previously mentioned, all diluted earnings per share amounts have been adjusted retrospectively for our 5-for-4 stock splits, which were distributed in April '17 and January '18. Depreciation and amortization expense totaled $19 million in the first quarter of fiscal '18, that was up from $15.2 million in the first quarter of fiscal '17. The increase in the first quarter of fiscal '18 principally reflects incremental impact of higher amortization expense of intangible assets from our fiscal '17 acquisitions.

Research and development expense increased 13% to $12.7 million in the first quarter of fiscal '18, and that was up from $11.2 million in the first quarter of fiscal '17. As you all expected, significant ongoing new product development efforts are continuing at both Flight Support and ETG, as we continue to invest approximately 3% of each sales dollar into new product development. Consolidated SG&A expense increased to $75.2 million in the first quarter of fiscal '18 and that was up from $60.9 million in the first quarter of fiscal '17. The increase in the first quarter of fiscal '18 principally reflects $8.9 million attributable to the fiscal '17 and '18 acquisitions and $2.2 million of higher performance-based compensation expense. Consolidated SG&A expense as a percentage of net sales increased to 18.6% in the first quarter of fiscal '18, and that was up from 17.7% in the first quarter of fiscal '17. The increase in consolidated SG&A expense as a percentage of net sales in the first quarter of fiscal '18, principally reflects a 0.3% impact from higher performance-based compensation expense and a 0.3% impact from an increase in the intangible asset amortization expense, mainly resulting again from our '17 and '18 acquisitions.

Interest expense increased to $4.7 million in the first quarter of fiscal '18, and that was up from $2 million in the first quarter of fiscal '17. The increase was principally due to higher interest rates as well as a higher weighted average balance outstanding under our revolving credit facility associated with our fiscal '17 acquisitions. As I previously mentioned, the comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act, contains significant changes to existing tax law, including, among other things, a reduction in the U.S. federal tax -- income tax rate -- corporate rate from 35% to 21% and the implementation of the territorial tax system resulting in a onetime transition tax on unremitted earnings of foreign subsidiaries. As a result of this tax act, we revised our estimated annual effective U.S. federal tax rate to reflect a reduction in the rate from 35% to 21%, effective January 1, '18, which results in a blended rate of 23.3% for HEICO in fiscal '18. In addition, we remeasured our U.S. federal net deferred tax liabilities and recorded a discrete tax benefit of $16.6 million in the first quarter of fiscal '18. In addition, we recorded a discrete tax expense of $4.7 million in the first quarter fiscal '18 and that was related to the onetime transition tax on unremitted earnings of foreign subsidiaries. Our effective tax rate in the first quarter of fiscal '18 decreased to 4.7%, down from 26.6% in the first quarter of fiscal '17. The decrease principally reflects the previously mentioned discrete tax benefit from the remeasurement of U.S. federal net deferred tax liabilities as well as the benefit of a lower U.S. tax rate, which were partially offset by a onetime transition tax expense.

By the way, for all of you on the call, Carlos Macau can explain and go through all the details. I know that the whole matter, the tax matter, is very complicated. On the other hand, it was a great boost to HEICO and it will result in HEICO's cash flow in the future being stronger, and we welcomed it.

Net income attributable to noncontrolling interest totaled $6.5 million and $5.3 million in the first quarter of fiscal '18 and '17, respectively. The increase principally reflects the impact of the previously mentioned tax act on those subsidiaries of Flight Support and ETG, in which noncontrolling interests are held as well as improved operating results of those subsidiaries. For full fiscal '18, we estimate a combined effective tax rate and noncontrolling interest rate between 27% and 29% of pretax income.

Now moving on to the balance sheet and cash flow. Our financial position and forecasted cash flow remain very, very strong. Cash flow provided by operating activities remains strong, totaling $45 million in the first quarter of '18, and we continue to forecast record cash flows from operations in fiscal '18. Our strong working capital ratio improved to 2.9x as of January 31, '18, compared to 2.5x as of October 31, '17.

Our DSOs, days sales outstanding of receivables, totaled 48 days in January 31, '18, pretty consistent with 47 days reported January 31, '17. Of course, we closely monitor all receivable collection efforts to limit credit exposure. No one customer accounted for more than 10% of net sales, top 5 customers represented approximately 18% and 21% of consolidated net sales in the first quarters of fiscal '18 and '17.

Our inventory turnover rate totaled 134 days and 127 days for the first quarter ended January 31, '18 and '17, respectively. The increase principally reflects slightly higher inventory levels, which we believe are necessary to support anticipated higher demand for our products during the remainder of fiscal '18. Our total debt to shareholders' equity ratio decreased to 50% as of January 31, '18, down from 54% as of October 31, '17. Our net debt, which is debt -- total debt less cash and cash equivalents, was $603.3 million as of January 31, '18, to the shareholders' equity ratio decreased to 45% as of January 31, '18. And that was down from 50% as of October 31, '17.

Over the past year, we have successfully completed 5 acquisitions, including the 2 most recent acquisitions in fiscal '18, which I referred to earlier. As you know, we are an acquisitive company that generates significant cash flow in order to maintain a healthy balance sheet without the financial burden of high leverage. Because of this strategy, our net debt to EBITDA ratio was a low 1.54x as of January 31 '18 compared to 1.67x as of October 31, 2017.

As far as the outlook, we look ahead to the remainder of fiscal '18. We anticipate continued sales growth within Flight Support, commercial aviation and defense products. We also anticipate growth within ETG, principally driven by demand for the majority of our products. During the remainder of fiscal '18, we will continue our commitments to developing new products and services, further market penetration, aggressive acquisition strategy, while at the same time, maintaining our financial strength and flexibility and maximizing shareholder returns.

I remind you, HEICO is not a capital-constrained company. We have enormous flexibility. We have our unsecured bank facility with some of the top banks in America is -- at $1.3 billion unsecured facility, we can probably raise it to $1.650 billion and outstanding is somewhere $600-some-odd million. So we have lots of room to accomplish our growth targets, which we try to focus at 15% to 20% bottom line.

Based on our current economic visibility, we are increasing estimated consolidated fiscal '18 year-over-year growth in net sales to 12% to 14% and in net income to 30% to 32%, up from prior growth estimates in net sales and net income, which were 10% to 12%. The increased net income guidance reflects the impact of a lower federal income tax rate and continued improvements in our consolidated operating results. In addition, we now anticipate our consolidated operating margin to approximate 20% to 21%, up from our prior estimate of 20%. And cash flow from operations is estimated to be approximately $310 million, up from our prior estimate of $290 million. Furthermore, we continue to anticipate depreciation and amortization expense to approximate $75 million, CapEx $50 million. These estimates include our recent acquisition of Sensor Tech, but exclude additional acquired businesses, if any.

In closing, we will continue to focus on intermediate and long-term growth strategies, with a laser focus on cash flow generation, growing our core business, acquiring profitable businesses at fair prices, maximizing shareholder returns.

I want to remind you that the management considers HEICO a vehicle for generating strong cash flow. Our total -- our most important focus is on cash flow generation, and we believe that when we have strong cash flow, which we do, the earnings per share will fall in line. So sometimes you can have earnings per share and no cash flow. HEICO is just the opposite. Normally, our cash flow runs between 140% and 180% of reported net income. So that is our focus, and we intend to be very disciplined and continue that focus into the future.

That is the extent of our prepared remarks, and I would like to open the floor to questions now. Thank you.

(Operator Instructions) Your first question comes from Rob Spingarn with Crédit Suisse.

This is Audrey Preston on for Rob. So just following up on the cash flow statements that you mentioned before. I understand that it's a very big priority for you and it's been very impressive over the past few years. When I was going through my model, I noticed that the cash flow guidance increase is a little bit less than what we would've expected from tax reform. So I was just curious, if you could comment a little bit on that. Is that just conservatism or (inaudible) involved?

Thank you for the good question and Carlos will respond.

This is Carlos. I think the reason you're going to see that phenomena is because you have a fair amount of noncash net deferred tax liabilities that you pull out of that income on the cash flow statement which impact the operating cash flow. So that's really the sole reason you're seeing that discrepancy.

If you look at the cash flow statement, because I went through this very question, your question's a good one. I went through this earlier with Carlos when I saw the statement. You will see the treatment of the deferred -- if you go to the cash flow statement, you'll see that we, in the cash flow, there is a deduction from operating income of $17.3 million in deferred income tax benefit. So this is really the -- I -- this is what Carlos is talking about.

Okay, great. Thanks for clearing that up. And then just a quick follow-up too. I noticed that CapEx appeared just a little bit light in terms of what we were expecting. So could you talk a little bit more about the cadence through the remainder of the year, do you see some sort of acceleration moving forward or what can we expect with that?

You know, at this -- this is Carlos. At this moment, I do expect us to gravitate to that $50 million number for the year. And I think there was, in the mindset of the business leaders that run our facilities, I do believe that there was a conscious effort to defer some CapEx last year into this fiscal year, primarily due to some of the -- at the time talked about changes in 100% expensing versus the old 50% rule. So I think those decisions were made. The interesting thing about it is, I probably would have expected a little more CapEx this quarter. But the mentality of the unit's business leaders that run our businesses, they're very frugal. And I think that -- while I know they have some CapEx in the hopper for growth and expansion, I think that every dollar they spend is precious to them and it causes them to react as such. So I wouldn't deviate much from the $50 million number I put out there for guidance but you're right, the cadence will probably be more mid- to bank end loaded on the spend.

Your next question is from Ken Herbert with Canaccord.

I wanted to first start and ask a question of fixed or the margins within the ETG segment were obviously, very strong. Can you provide a little more detail on (inaudible) maybe there from the recent acquisitions relative to sort of base business performance and maybe some of the benefit of mix you're seeing. Any more detail on that in the quarter would be helpful.

Yes, Ken, this is Victor. It's -- those are good questions. It was pretty broad on the margins -- the improvement in the margins this quarter. Acquisitions contributed to that. But we were happy across-the-board. And as you know, the margins move around and we're very focused on the performance over the course of the year. So they tend to be volatile, so what may happen in one quarter may not happen as you know in the next. But as I said, it was -- it's nice and broadly based.

Okay. Can you just -- now that you've had the business, I know just a few months but provide any more detail on your expectations, specifically, around AAT and relative to some of the priorities now we've seen in the fiscal '19 defense budget. What do you think of that business from sort of an organic growth perspective, maybe opportunities in the next 1 to 2 years on that business? It seems like a great fit, certainly with priorities today. Just looking for a little more detail on how you're modeling out that business.

Sure. It's a growing business for us. It's experiencing its own organic growth. You know the way we account is very conservative. So we don't consider it's organic growth to be organic growth until we've owned it for a full year, right? So until September of this year, we won't call it organic growth, which is quite a while. But it's growing, it was growing when we were buying it and when we bought it, and it's growing this year. We would expect that the budget priorities as they've articulated so far would indicate more growth as well as what we're seeing on the commercial side because they -- good chunk in their business is commercial, they're very successful there as well. It's a great company with some broad-based penetration. They're working on new programs. On top of that, they do tend to do some work on precision-guided munitions, and as you know from the budget, that is a priority for the DOD, both in terms of recapitalization and for current operations in our operations tempo.

Okay, I'd like to -- Ken, I'd like to add one thing. The management of that company is fantastic. I mean, a great, great manager and it's really a wonderful company and great management produces great things.

That's helpful. And Larry, if I could just one final question. You've, obviously, had 2 very sort of strong years in fiscal '17 and '18 from a capital deployment for acquisitions. I know, obviously, from your comments, you've got plenty of capacity and that's never a concern. What -- can you just comment on what you're seeing today in terms of opportunities, maybe where you're focused in any one particular area or markets if there is one, and how should we think about potential activity levels here throughout the remainder of fiscal '18?

Okay. So the answer to that is that we remain very disciplined in terms of what we will pay because, well, money is getting more expensive now. There is a lot of competition in the market. All you have to do is read about Warren Buffett and he is buying treasury bills because he can't find things at good prices. Interestingly enough, because of our discipline to pay somewheres and depending on the deal 5x to 8x EBIT or EBITDA, we don't focus really on EBITDA because we think the depreciation ultimately becomes CapEx and it's cash, and I think you understand that. We are very disciplined and the type of buyer that we find and the person that wants to sell to us is somebody who is looking for a cultural fit and the ability to keep, say, 20% of his business and have a put and call and all these companies say, next year we're going to do better and better and better. And if that's the case, a seller to us will have a liquidity event and have another 20% on the back end, which often can be more than the first 80%, if he really produces. It is also a person who is not just looking for the top dollar, and we explain this going in. And we tell people, if you want the top dollar, we are probably not going to be your buyer. And so, it doesn't matter if the multiples run from 10x EBITDA to 12x EBITDA, because we're not there any way, and we tell people right upfront. But if you want to sell your business, run it, and be able to keep your employees, keep your organization together, keep busy and determine the future growth to a great extent of your operation, we will be your best buyer. So those people, since they're not looking for the top dollar, we explain it to them, will continue to sell to us. And the answer is, yes, we are looking at a number of transactions. Some of them -- one recently, the guy just wanted more money than we're willing to pay and the answer is no, we're not going to pay that. So we have to -- we want to make acquisitions, which are accretive in the first year, which have strong cash flow, generally low CapEx and so forth. And we are able to find companies that fit that description without competing at 10x, 12x, 14x EBITDA. So I think our potential is still very good. We're doing -- what's our volume is $1.7 billion, so we have room to grow and I think we can make additional acquisitions and keep up the focus on our target of 15% and 20% bottom line growth. Does that kind of answer your question?

Yes, that's very helpful. I appreciate it. So I guess, I take from that and it's consistent with prior comments, that you're not necessarily prioritizing any market now over another but you're clearly taking what the market provides and staying disciplined and also being opportunistic?

Completely opportunistic. So since we are not capital constrained, if we see a great deal in ETG and Flight Support, we'll do both of them. And on the other hand, we don't want to grow too fast, and we don't want to pile on debt. Again, looking at Buffett, Buffett says that's how you get in trouble, and we agree. So we've always had a relatively low debt profile, and we know because Carlos builds projections, and we know how we can grow, what debt we need to grow and we can grow at 15% to 20% target with the credit line that we now have. We don't have to sell more stock, and we don't have to do all kinds of fancy footwork to do it. And as you know, we buy companies for cash. We prefer not to give stock and dilute shareholders.

Your next question is from Larry Solow with CJS Securities.

Just a couple for Eric. Maybe just -- your thoughts just on the general -- the after -- the macro and the aftermarket, I think '15 and '16 were a little slow, obviously, but you saw some recovery last year and you guys have continued to outperform and of course, we know yours is all volume and no price. But any real change or we sort of a solid continued growth projection and anything with rising oil, has that done anything to spending patterns?

This is Eric. No, I would say everything is consistent with how it's been, really, for at least the last year. There is tremendous enthusiasm for our products. Our customers are -- continue to show a lot of interest in our new products, they're wanting us to go into various areas. We have very strong relationships with them. In terms of inventory, they don't hold much inventory, which we've been saying now for the last many years. So they depend on us to be able to deliver. But OEMs continue to raise prices and continue to employ abusive tactics. So we are their go-to company. So I think everything is very much continuing along the same lines. It's sort of steady as she goes.

Okay. And on the repair side, you guys had a little bit of a lull, I think early on in '17, is that pretty much past us now? I know South America impacted that a little bit as well, is that pretty much -- that was just pretty much a temporary thing?

Yes, I think that was maybe 2 years ago or so. But yes, that's past us, and we're doing very well in the repair markets.

And just last, there's a little bit of a -- the shift to the -- continued shift to the right on the specialty products on the defense side and I think it relates more to some restrictions on exports. Just your confidence level that, that should rebound as we look out over the next couple of quarters?

Absolutely. We had the orders, sometimes these orders with foreign military programs can flip to the right, you read about them all the time. Between our governments, foreign governments negotiations, just everything can take some time. And then all of a sudden, they need it right away. So we do have the orders, and I would say the -- there should be a nice improvement in the second half of 2018 for us in that area. Maybe a little bit in the second quarter, but I'd rather -- I feel more comfortable saying second half because we've got to spool up and basically make some of this stuff, get it out the door and -- but I feel very good in the second half that's all going to be behind us.

Your next question is from Sheila Kahyaoglu with Jefferies.

I guess first -- Eric, one more for you actually on the aftermarket demand. It has been more consistent than some other suppliers, maybe if you could elaborate on, just replacement trends that you're seeing in the market, if you could give any color at all?

Sheila, I think replacement continues to be very strong. One of the things, which of course can skew the results, as you know, is the initial stocking orders. So HEICO does not benefit from initial stocking. And I think that, that can cause wide swings among other aftermarket participants. And I think recently, there have been a number of initial stocking orders, which have had very positive results for various market participants. Our business continues to be very strong. The fundamental dynamics are still there. Of course, also we've read in the newspaper about companies that employ all sorts of bizarre accounting techniques to measure performance, HEICO doesn't do any of that, ours is real basic. We get an order, we ship it, we bill it, we collect the money. It's not a black box where people can't understand what's going on. It's -- we're extremely transparent. So I feel very confident about the direction that this is going in. And about our continued strength in -- really in all the markets in which we operate.

Great. And then just one more, more broadly in terms of segment margins. The increase of 100 basis points in segment margins, what gives confidence and the acceleration as we progress throughout the year?

Sheila, this is Carlos. First of all, congratulations on becoming a new mother (inaudible) I think if you're looking for a direct reason for the increase, we can -- we experienced some nice market improvement in ETG, which we had to acknowledge, and we believe that, that improved margin is sustainable for this year, maybe not in absolute terms, but a general trend upward. So that's the main culprit, if you would, that's causing us to be more optimistic in our consolidated margin increase.

Your next question is from Michael Ciarmoli with SunTrust.

This is actually in Les in for Michael. Just to go back to the margin question and in particular, to FSG. Noticing that as you mentioned ETG perhaps, you'll see some upside there, but would you look at FSG as running kind of at peak margin or peak profitability at this point? There were some incremental margin growth of about 13%, but how can we look at that segment?

I think our numbers are fairly consistent. No, I don't -- to specifically answer your question, I don't believe we're at peak margin. We did have -- and Carlos can get into it, we did have some intangible amortization headwind, which impacted the numbers. But I think that, I anticipate that we're going to be performing, certainly on a EBITA basis, consistent with how we've done in the past. As we make acquisitions, of course, we've got this intangible amortization headwind, which, personally, I happen to think is silly because our companies grow, yet we have to amortize the intangible and reduce our operating income as a result of it, when in fact, value of the company is going up, the earnings are going up. So to me, it really makes no sense but the rules are the rules, so we have to conform. But I think that there is continued upside on those margins. And I think Carlos can add some specific comments.

I think, Eric, you captured all of it. I was going to say, I do believe that Eric is correct that we're not at peak margins. And as you know, when we -- we did 2 acquisitions last year, which contributed incrementally a fair amount more margin compression, which, usually is with us for the first couple of years of an acquisition, it tapers off after that based on the way we amortize these intangibles. So to Eric's point, the EBITA margin is very consistent with history. So no worries there on our end.

On the -- just to go into Robertson Fuel Systems, at the time of the deal, that was one of the largest acquisitions you guys made. So clearly a lot of military exposure there, specifically, in helicopters, but what does the outlook look like now for Robertson, given that budget upturn and I guess importantly, the opportunity within ground vehicles that appear to be poised for some solid growth optic. What do you look at that in terms of that business?

This is Victor. The answer is, of course we don't really usually comment on the numbers of our individual subsidiaries. But broadly speaking, Robertson is doing well. We're optimistic, we continue to be optimistic about it. The budget priorities align very well with what Robertson is doing. So that should bode well for Robertson. They've also had success in the commercial market now, with crashworthy fuel systems for commercial helicopters, and we are now selling and shipping those. So it continues to be an excellent acquisition. We have a great team there as well, focused on growth. I feel pretty good about it.

Okay. Just last one, I'm not sure if you mentioned or not but what would be the assumption for the tax rate for the full year?

This is Carlos. What we did was, as you know, with the new tax rules, the implementation of it is provisional. So we're still going through the macerations. But right now, our guidance is 26% to 28% for both the effective tax rate and the noncontrolling interest charge. So looking at them together, about 26% to 28% of pretax income.

(Operator Instructions) Your next question will come from Drew Lipke with Stephens.

Maybe first for Eric, the 4% organic growth, 6% in aftermarket, you talked about specialty picking up in the back half of the year, the comparisons there do get easier. I realize your visibility is somewhat limited in aftermarket but you talked about the underlying trends being very good. Is there -- with this backdrop, is there anything that maybe gives you pause or makes you think that organic growth will not be greater than this kind of mid-single digit range?

I feel that we'll continue to perform much as we've had. I think that the organic growth, it's certainly possible to do much better, as in we are doing now. The specialty products' headwind, as I mentioned, earlier, I think will be finished and in the second half, we will see improvement there. I just feel very good about the underlying strength of our markets and how our customers feel about us. Again, as you are familiar, we have to fight for every sale that we get, our competitors are very vicious and want to hold on to all of the ground that they've got. So we have to work very hard, none of this comes easily or for free. But I feel that we definitely can perform in excess of what we're doing now.

Okay. And then, maybe for Victor and putting a finer point on a question from earlier, if you think about the inorganic growth contribution that's implied in guidance, it's kind of $45 million to $60 million or so for fiscal '18. And if you look at the pro forma sales for AAT back in '17, it was $68 million, it was growing over 30%, You talked about the budget trends and the growth within AAT, and then now we're layering in IDC and Sensor Tech. Is there any kind of share loss or market share loss with AAT that we should be concerned about or is there any reason that, that shouldn't from a pro forma basis continue to grow from that kind of $68 million that it posted in fiscal '17?

Well, we put pro forma numbers in the K, but that was not what it did in fiscal '17. So your number is not really applicable here. It's an excellent -- all I'll say on it, is it's an excellent business, we're happy with its growth, we are happy with its margins. I'm not going to say what the margins are, I'm not going to say what the growth is and I'm not going to say what the revenue is. Because we don't break that out. But I can tell you that we're very happy with the business and if we had it to do all over again, I would do exactly the same thing. We would do exactly the same thing that we did.

Yes, it seems like a great acquisition. Just last one for Larry on the M&A pipeline. Would you classify it as more kind of tuck-in opportunity such as Sensor Tech or more opportunities kind of in the range of AAT? Are there any kind of transformational opportunities in the pipeline? Any way that we should kind of think about that?

The answer is all of the above. But I -- we don't really comment individually and to go out on the limb and tell you it's going to be one thing or another, deals don't impact us until we close. And as you know, closing a deal is very difficult and lots of things happen. So we can be in the middle of due diligence, and all of a sudden, the thing blows up. So that's why we don't really like to comment on anything. We're -- as I think Ken Herbert said earlier, highly opportunistic. We will buy companies. We are not only tuck-in acquisitions, absolutely not. We -- whatever is opportunistic for us, we will buy it. If it's priced right, if the product line is right, if the margin meets all of our criteria, that's what we look for. So I can't give you anything consistent, except margin and cash flow. That's what we're looking for. And if it doesn't meet those hurdles, we're not interested.

That does conclude our Q&A session for today. I will now turn it back to management for their closing remarks.

Larry Mendelson again. I want to thank you all for your interest in HEICO. We remain available to field your questions, you know where to reach us by phone or visit, and we look forward to the second quarter conference call, which will be in about 3 months. So to you all, have a good day, and again, thank you very much for your interest and confidence in HEICO. That's all we have.

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