HEICO Corp (HEI) 2004 Q3 法說會逐字稿

Good morning and welcome to the third-quarter results conference call. I will now turn the call over to Laurans Mendelson, CEO of HEICO Corporation.

Good morning. Thank you, Jessica, and good morning to everyone on this call. We welcome you to the HEICO third-quarter fiscal '04 earnings announcement teleconference. I am Larry Mendelson, CEO of HEICO Corporation, and I would like to remind you that HEICO does have 2 classes of common stock traded in the New York Stock Exchange. Both classes, the Class A Common and the Common Stock are virtually identical in all economic respects. The only difference between the shares is voting rights, with the Class A receiving 1/10 vote per share and the Common stock receiving 1 vote per share.

This morning I am joined by Eric Mendelson, President of HEICO's Flight Support Group; Victor Mendelson, President of HEICO's Electronic Technologies Group and HEICO General Counsel; and Tom Erwin, HEICO's Executive Vice President and CFO. Before we begin, Victor Mendelson will make a statement.

Thank you. Certain statements in this conference call will constitute forward-looking statements which are subject to risks and uncertainties and assumptions. HEICO's actual results could differ materially from those expressed in or implied by these forward-looking statements as a result of factors including but not limited to lower demand for commercial air travel or airline fleet changes, which could cause lower demand for our goods and services; 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 or space spending by U.S and/or foreign customers; or competition from existing and new competitors, which could reduce our sales; HEICO's ability to introduce new products and product pricing levels, which could reduce our sales or sales growth; HEICO's ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk, interest rates, and economic conditions within and outside of the aerospace defense space and electronics industries which could negatively impact our costs and revenues.

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 Forms 10-K, 10-Q, and 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. Thank you.

Victor, thank you. Now before we review our third-quarter operating results in detail, I would like to take a few minutes to summarize the highlights of the third quarter.

Both our Flight Support Group and the Electronic Technologies Group reported higher earnings in the third quarter of '04 compared to the same period of '03 on increased sales. Consolidated operating income increased by 29 percent from the third quarter of '03 on sales growth of 23 percent, and this reflects both organic growth, which approximated 15 percent in the third quarter '04, and through growth by strategic acquisitions. It also reflects an all-time quarterly high in our PMA aftermarket sales. The higher sales and operating income contributed to a 150 percent quarter-over-quarter increase in net income.

Net income in the third quarter of '04 also includes $4 million net of minority interests in the proceeds from a key person life insurance policy maintained by a subsidiary of the Company's Flight Support Group as well as $600,000 for pretax restructuring expenses within certain subsidiaries of the Flight Support that provides repair and overhaul services, not the parts business.

I'd like to expand a little bit further on the issue of the life insurance. In my opinion, management's opinion, we had a sensational quarter. We were truthfully hoping that the life insurance proceeds would not come in the quarter so as to increase the net income any further from this type of special item, and we look at this as a non-operating item. It is a non-operating item. It is shown below operating income on our financial statement and except for the cash flow benefit that we get from it, we ignore it in our operations. So as operating people, we look strictly at operating income to see how the Company has done, and we think the Company has done extremely well, ignoring this special item.

Going back to the restructuring activities that I mentioned a moment ago, they reflect the commencement of a plan that will also involve the consolidation of 2 West Coast repair and overhaul facilities over the next 6 months and some related management hiring and relocation expenses, and we know that these changes will allow us to better serve customers while further improving operating margins.

The results for the third quarter also include about $235,000 of pretax legal and other cost related to litigation brought by a subsidiary of the Company's Electronic Technologies Group. The net impact of the insurance proceeds reduced by the restructuring expenses and the litigation related expense increased net income after income taxes and minority interests by $3.6 million or 14 cents per diluted share in the third quarter.

Cash flow generated by operating activities continues to be very strong, allowing us to pay down our revolving credit facility by $8 million in the third quarter along with $5 million in the first and $10 million in the second, which totaled $23 million in the first 9 months of '04. In July we paid our 52nd consecutive cash dividend since 1979.

In May we announced that our component repair companies have been awarded a 5-year contract to supply repair and overhaul services for the thrust reverse or actuation system on the American Airlines fleet of Boeing 777 aircraft and we continue to expand our capabilities in New Generation aircraft. And we believe that the results of this quarter indicate that we have established a strong foundation for HEICO's return to the long-term sustainable growth in sales and earnings.

Now going into drilling down a little deeper and going to the individual items on the P&L for the quarter, in revenue our consolidated sales in the third quarter of '04 increased $10.4 million, about 23 percent from the third quarter of '03, reflecting substantial increases in the Flight Support Group and Electronic Technologies Group. Revenues of Flight Support increased 22 percent to 40.1 million in the third quarter, up from 32.7 in the third quarter of '03. The increase in Flight Support’s revenue resulted from improved demand for the Company's aftermarket replacement parts and repair and overhaul services and reflects the continuing recovery within the commercial airline industry as well as increased sales of new products and services.

The sales of our non JT8D PMA parts showed 25 percent growth in the first 9 months of '04 versus '03 and reflects the quarterly -- the record quarterly sales that I mentioned earlier, substantially all of Flight Support’s growth year-over-year results from organic growth. Just as an additional comment, this morning I saw one of the analysts on the street mention the strong gross in the active aircraft fleet. It was up about -- the fleet was up about 5.3 percent and is at a high end of a 3 to 5 percent annual historical fleet growth and it is the strongest in this analyst's records since early 1993. And there is a decline in the parked planes by about 16 percent, a reduction of about 59 planes or 4 percent. So what we're seeing is what we really expected and predicted; a great strengthening in the fleet and of course the more airlines flying, the more planes flying, we believe the stronger our business will be.

The revenues of Electronic Technologies increased 23 percent to 15.7 million in the third quarter of '04, up from 12.8 in the third quarter of '03, reflecting our entry into the microwave components field through an acquisition which we made in December of '03.

The revenues for the first 9 months of '04 were comprised of approximately 65 percent from commercial aviation, 23 percent from defense and space, and 12 percent from other markets, which include industrial, medical, electronics and telecommunication. The revenues for the first 9 months of '03 by market were about 69 percent from commercial aviation and 21 from defense and space and 10 from the other markets.

Moving on to operating income, our consolidated operating income in the third quarter of '04 increased by a strong 29 percent to 7.9 million from 6.1 million in the third quarter of '03. The increase in operating income reflects strong earnings in Flight Support and Electronic Technologies partially offset by the restructuring and litigation related expenses previously discussed. Operating income does not include any proceeds of that life insurance that we have talked about earlier.

Operating income of Flight Support in the third quarter increased 25 percent to 6 million from 4.8 in the third quarter of '03, reflecting higher sales in gross profit margins, partially offset by higher SG&A expense as a percentage of sales. And this is due to the restructuring expense we talked about earlier.

Operating income of Electronic Technologies increased 27 percent to 3.4 million in the third quarter of '04 from 2.7 in '03 and that was due to the acquisition I talked about earlier and increased sales of higher margin profits.

Consolidated operating income in the first 9 months of '04 increased 37 percent to 22.6 million from 16.6 million in the first 9 months of '03, also reflecting strong earnings increases in both of our business segments.

The operating margins consolidated totaled 14 percent in the third quarter of '04, up from 13 percent in the third quarter of '03. Year-to-date for 9 months, operating margins increased about 2 percent year-over-year. So we're seeing strong increases in all areas -- financial areas of our business.

The operating margins of Flight Support were 15 percent in the third quarter of '04 and the same as the third quarter of '03 and were reduced in '04 by approximately 1 percent by the restructuring charge. The operating margins of Electronic Technologies continued very strong at 22 percent in the third quarter of '04, up from 21 percent in the third quarter of '03, and this was the result of addition of microwave components products as well as increased sales of higher margin products.

Diluted earnings per share increased 19 cents to 32 cents per share in the third quarter of '04, up from 13 cents in the third quarter of '03, reflecting a 150 percent increase in net income. Incidentally we are required to report earnings per share in this manner. That is an SEC requirement and we're not permitted to really comment on operating and adjustments and so forth, but analysts can do their own calculations.

And to help you do that, the impact of life insurance that we are allowed to say that the impact of life insurance reduced by the restructuring expenses and litigation accounted to 14 cents of the diluted earnings increase, with the balance reflecting the increase in operating income.

Depreciation and amortization was about 1.7 million in both years. Research and development net expense, which is fundamental to our mid and long-term growth, was approximately 2.3 million in both the third quarters of '04 and '03. I do want to point out that year-to-date the R&D, the net R&D expenditure is up by about $275,000 in '04 over '03 and of course that does impact the bottom line. That is an increase of about 4 percent in R&D spending and we know that will benefit future periods and that is why we do it.

The addition of the new FAA PMA approvals particularly for non JT8D aircraft continues to be critical to our mid- and long-term growth in light of the retirements of the JT8D standard fleet in the aftermath of 9-11. We currently have approximately 400 parts in our development pipeline, 99 percent of which are for non JT8D engines and we have over 3300 parts approved by the FAA and for sale. Over 70 percent of these parts are non JT8D.

New parts released by our R&D groups in the third quarter continued at a very strong level and pretty much as budgeted for the period. We are targeting approximately 300 new PMA approvals in fiscal '04, and that is equivalent to the new PMA certification levels of '02 and '03. In my opinion that is a staggering number, it's about 6 a week approvals, and we think that is outstanding. We also have a number of new parts under active development in Electronic Technologies.

SG&A expense as a percentage of sales increased to 21 percent in the '04 quarter from 20 percent in the '03 quarter, reflecting a 1 percent increase attributable to restructuring and litigation related expenses. SG&A dollar spending increased to 11 million in the '04 quarter from 9 million in '03 quarter principally due to higher sales within the Flight Support Group, the previously mentioned restructuring and litigation related expenses, the microwave components division acquisition in '03, as well as a small increase in corporate expenses that we had.

Interest expense in the third quarter of '04 decreased by a small amount, 57,000 compared to third quarter of '03 and it was due to a lower weighted average balance outstanding under the Company's revolving credit facility. Our cash flow is used principally to reduce our revolving credit facility and our cash flow is so strong the banks want to lend us more money. We are conservative in our acquisition policy, so we don't take it down until we really need it.

During the first 9 months of '04 we incurred net borrowings of $4 million under our revolving credit facility, reflecting $27 million, which we used to fund the acquisition in December of '03 net of the repayments of 23 million, which we made during '04 which includes of course the 8 million repaid in the third quarter of '04.

Interest and other interest income and other amounts in the 9 month period in the third quarter were not significant except for the life insurance proceeds which we talked about ad nauseum.

Income taxes, our tax rate in the quarter decreased to 20.4 percent from 36.3 percent in the third quarter of '03 because the $5 million in life insurance proceeds and a portion of the minority interest share of our income; the life insurance 1 million was the minority share of life insurance. Those items are excluded from consolidated income that is subject to income taxes.

The minority interest share of consolidated subsidiaries was 2 million in the third quarter '04 compared to 0.5 million in the third quarter '03, and it represents principally the minority interest held by Lufthansa and American Airlines and our Flight Support Group as well as the 20 percent minority interest held in our microwave products subsidiary. The increase over the prior year is due of course to the higher earnings in the Flight Support Group as well as the income from the microwave components products acquisition and again $1 million of the minority interest is due to the life insurance proceeds.

Our financial position remains extremely strong. Cash flow from operating activities remains strong and totaled 32.6 million in the first 9 months '04. That does include 5 million from life insurance proceeds. Cash flow from operating activities was 15.9 million in the third quarter '04, including life insurance proceeds and it compared to 4.6 in the third quarter of '03.

Cash flow from operating activities equaled 195 percent of net income in the third quarter of '04 and 211 percent of net income in the first 9 months of '04 and we believe that this truly reflects the very high quality of our earnings.

Our working capital decreased slightly from 4.2 times as of October 31, '03 to 3.9 as of July 31 '04, and that is really due to a $3.7 million increase in accrued expenses and other current liabilities.

DSOs of accounts receivable as of July 31 '04 improved by 4 days to 52 days compared to 56 days at October 31 '03. We do continue to closely manage receivable collection efforts and maximize cash flow from operations in the current business environment, and we continue to work diligently to manage our credit exposure in light of the continued financial challenges facing some of our customers in the airline industry. No customer represented more than 10 percent of consolidated sales in the first 3 quarters of '04.

Inventories are down over 4 percent since October 31 '03 and inventory turnover has improved to 124 days as of July 31 '04 versus 146 days at October 31 '03. And we continue to review these inventory levels to insure our capital allocation to inventories is adequate to meet the demands of customers, but not to be excessive.

Our long-term debt to capitalization ratio of 13 percent is very low as of July 31 '04; it was the same at October 31 '03. Of course keep in mind that we made an acquisition in December of '03 and the net result -- we paid it down so quickly that our long-term debt to capitalization ratio just remained the same in the approximately 9 months.

CapEx in the first 3 quarters of '04 was 3.4 million. It is in line with the annual budget of 5 to 6 million for '04.

Looking forward the outlook based upon the improved operating results through the third quarter as well as the improving market conditions in the commercial airline industry, we are raising our fiscal 2004 sales growth target to 20 percent over '03 and we are increasing our diluted earnings per share target to a range of 78 to 80 cents for the year. This would represent the significant increase of over 50 percent from the '03 per share results.

Fiscal '04 cash flow from operating activities should approximate 39 to $40 million versus 28 million in fiscal '03. And fiscal '04 CapEx should total about 5 to 6 million as I mentioned earlier. We are very proud of the HEICO team effort since the events of 9-11. Three years ago we saw falloff as much as 65 percent in our core PMA products, the JT8D fleet. And we could have cut our R&D and shown higher profits over period after 9-11, but we were committed to our shareholders, employees, and customers to recover and as evidenced by our record PMA sales, we believe we are there. Just to remind you again our PMA sales actually now exceed the level of PMA sales pre-9-11. We think that is a miraculous accomplishment because of the drop in JT8D and the acceleration in our R&D expenditures and activities to produce approximately 300 new parts for sale in manufacturing, sales and distribution and we had targeted this goal internally of course and we have met that goal and actually exceeded it really.

We replaced our dependence of JT8D products on a broad and ever-increasing product line serving a substantial majority of our customers fleet's and we have established strategic relationship with 6 of the world's largest and finest airlines. In addition we have created a core electro optical product family servicing a variety of defense and space and electronic customers in the Electronic Technologies Group.

We look forward to the fourth quarter of fiscal '04 and fiscal '05 and beyond, and we believe we have established a very strong foundation for long-term growth in sales and earnings. Both traffic and capacity are growing within the commercial airline industry and our focus continues on new product development in both business segments as well as our strong balance sheet, and we believe that HEICO is again poised for continued very strong growth as we move into the future.

That is the extent of my prepared comments, and I would like to ask our operator, Jessica, to open the floor to any questions that may be out there. Thank you all very much.

(OPERATOR INSTRUCTIONS) Chris Donaghey.

Great quarter. I was just wondering first of all can you give us a little bit more in the information on the litigation expenses?

In what regard?

Just what is the nature of it? You said it was a subsidiary in the Flight Support Group.

Yes, we brought the litigation. It is our litigation. Nobody is suing us and Victor, as our General Counsel will comment on that, Chris.

Hi, Chris. This is Victor. The litigation is a lawsuit that we brought against 2 former employees, management employees of our -- one of our subsidiaries in the Electronic Technologies Group and it is breach of contract action as well as other possible causes of action and includes injunctive relief, which we obtained against them competing against our subsidiary.

Okay, also just real quick, Larry, can you comment a little bit about how oil prices may be affecting the airlines? I know there's an article in the Wall Street Journal last week talking about how some of the airlines are taking some of their older aircraft and grounding them because they consume more fuel and I would assume that those would be the types of aircraft that would be the most likely to consume PMA parts as well.

Chris, as a general comment and this is not -- I am going to tell you something that you know and I guess we all know that increasing oil prices do not help our economy at all and it doesn't help the airline industry, because it is more costly and the airlines complained to Washington this morning about oil prices and the strategic reserve and everything else. So it is definitely eating into profits and creating larger losses for the airlines. Now as far as us seeing airlines taking aircraft out of service and so forth, we have not seen that and Eric is here shaking his head no. We have not seen any of that and as I point out, I think a stronger indicator is the reports that are coming out on the active fleet which is up 5.3 percent.

I think we see it going just the opposite that the airlines and the new LCCs are trying to put every kind of airplane they can. You have seen articles about leasing rates, aircraft leasing rates have skyrocketed over the past few months. So we as a total ball of wax our reliance on JT8D is not very great anymore and we have a potpourri of parts for all kinds of engines. So I don't welcome higher fuel prices. I don't think anybody does except the guys selling the stuff, but for the rest of us I don't want to see higher fuel prices even to fill up my automobile. But we don't see that as impacting us in a major way. I mean if the price had gotten so high that the airlines shutdown operations, yes, but at the moment that is not really affecting us at all and we don't foresee that it will.

Okay, thanks and one final question given the couple quarters now of 20 percent year-over-year growth in the second quarter and the third-quarter, can you see into 2005 is that type of growth sustainable or should it tail off? What should we begin to think about for 2005?

I think we have said, we've indicated that we can run 15 or 20 percent without acquisition. HEICO has always been a very high-growth Company and it is because of new products and so forth and what we do in our margins. I think it is our business strategy. We took a hit in 9-11 principally because of JT8D and some other but it was always our goal. We cranked up the R&D. It was the business plan and we think we have gotten on top of the cycle now and we feel pretty confident. We feel very good about the outlook. We see what we're selling. We see the parts we're selling internally. We understand. We see the market acceptance increasing.

The one positive of airline losses is that they have really gotten religion and I can tell you that we have had meetings with some of the major airlines, some of our major customers with some of the top people and Eric and I were out in California -- and Victor were out in California and we met with some of these top people in the various airlines and there is real religion and desire and understanding to buy these alternative parts. They understand that the only way to cut engine overhaul cost is through the PMA, so we just think the outlook is extremely good.

Okay, great. Thanks.

Chris Quilty.

Good morning, gentlemen. Just a clarification here before I ask questions. If we back out all of these one-time items, it looks like you're at about 18 cents for the quarter, which is in line with the consensus and given the forward guidance for the full year, it looks like you are baking in a range of 17 to 19 cents for the fourth quarter, which is a little bit below the consensus there. Do you feel that the numbers are a little bit aggressive or given the trend we have seen in the last couple quarters here, the strong trend, is it possible to see perhaps a little bit of upside?

I am going to let Tom get into the detailed numbers. I think that we had given guidance to the street of 65 cents. Tom is shaking his head yes. I thought that we were focused on 65 cents. I'm not sure what the estimates of the street were, but we thought if we did better than 65 cents that we would be doing well. So I think that if you back out the special items and so forth, we will do better than 65 cents.

But as we go forward, I think that our earnings -- if we give guidance, we really believe that that is what it is going to be and sometimes the street gets a little bit ahead of us and that is hard to catch up. We don't want them to do that but I don't have any really further comments on the earnings numbers. I will let Tom comment on it because he has got a better handle on the detail.

This is Tom Erwin what Larry commented on was true. Just one other minor item of explanation and that is with respect to the restructuring charges in our 8-K that we filed along with press release there is a little bit more color on the restructuring besides the 600,000 that we made reference to in the third quarter earnings. We are estimating somewhere between 4 and 6000 over the next 6 months. That is basically a negative penny if you will that we're commenting prospectively on that would likely bring down the 14 cents net positive non unusual items rather to 13 cents for the full year if that penny happens as expected.

Okay and will that hit in the cost of goods or in the SG&A?

Actually again from the 8-K you can discern that it is primarily the items of relocation etc. which are reported in SG&A, so it would be a potential charge in SG&A in the fourth quarter.

Okay, fair enough.

Chris, one of the things that triggered this is truthfully the life insurance proceeds and it was a more efficient way and we think that again we like to invest today and we reap significant benefits tomorrow as a result. So obviously it is not a huge restructuring charge. We are moving a couple facilities together and that is what it is all about. We didn't have to do it but we think we will get a lot of mileage and we will see the results as we go forward. So we take the hit now, a small hit. We think there will be pretty significant benefits as we go forward.

Okay, good. Obviously the encouraging thing here is I went back and looked at the numbers. This is the first time at least I can see since the second quarter of 2000 that you had 2 quarters of back-to-back double-digit growth in the Flight Support Group and I am presuming that that is what gives you the most confidence for the 15 to 20 percent organic growth on a go forward basis?

That is right, Chris.

Can you comment specifically on the overhaul side of the business? Do the trends in the PMA and the overhaul business pretty much move in tandem?

I'm going to let Eric handle that Chris.

Chris, its Eric. Yes, there are trends which move together there. We have had a major investment in our PMA parts business, so we would anticipate higher growth percentage coming out of that just because that's where we're spending all of the R&D and that's where we have this major competitive advantage. But we are also seeing good growth in the component overhaul business and good use in the component overhaul business of our proprietary HEICO parts.

You also mentioned that you're doing some PMAs within the ETG Group, or was that in the overhaul side?

I don't think I said PMAs. I think I said that we're doing research and development in the Electronic Technologies Group.

Okay. Specific to the overhaul side the business -- you haven't talked awhile about Future Aviation and RJ market and any -- what sort of progress you're seeing there and are you still looking at acquisitions?

Yes, we are very encouraged with the growth that we have had in the RJ market. As a matter-of-fact, I think HEICO is one of the largest if not the largest independent provider of component overhaul services for the RJ market; we are doing very well. We have a very good brand and reputation, productline there. As a matter-of-fact I'm very proud of the group. They have won some significant contracts this past quarter and I anticipate that growth to continue.

Okay, is that growing faster than the core commercial business? Large airline business?

In the repair several parts side?

I'm sorry, on the overall side of RJ parts versus what you're doing in regular commercial airlines.

No, I don't have honestly those numbers broken out to that level in front of me right now, but I would not say that there is a material difference. I would say that our penetration in the component overhaul market for RJ is higher than our penetration in the component market for large commercial aircraft but the total dollars coming out of growth from 1 portion or the other is probably not all that different.

Okay. A question on the ETG Group. It had sort of spotty but at least consistent growth over the last 4 quarters. Because there is not coherent them amongst a lot of the businesses in there, can you give us a sense of what you feel the drivers are for the business and what the organic growth might be on a go forward basis over the next 12 months? And level of confidence?

Chris, I'm going to turn it over to Victor.

I think that the primary drivers there will be at twofold. One will be -- or threefold actually -- one will be on the Electro Optical side of our business with some of the newer products that we have been developing over the last 2 to 3 years as they make their way into the market and the sales ramp up on those.

And are those primarily military applications?

All military applications. And things for which -- long lead items. I anticipate that we will also start to see some growth in the shielding side of our business. We have actually seen some growth in the shielding side of our business over this year and we would think that that should continue and that is mostly commercial. There is some defense in there. And then I would expect to continue to see acquisitions in the business. By the way also on the commercial side, I would hope to see some growth out of the space business as well.

Okay. And my standard question I always ask you.

On the cockpit voice recorder?

Yes.

There is nothing new there. We still don't have it in our projections. I have spoken with the FAA about it. I think it is really a cost issue. Informally -- and off the record keep telling me they expect that that eventually they're going to have that in the rule, but right now it is just -- they have bigger fish to fry.

Fair enough. Someday your horse will come in on that one.

I think we've had actually some very low dollar amount sales for some military applications of it. We have had quoting activity and other realms for newer aircraft that will be coming out down the line but I just don't want to put it in our revenue at this point.

Very good. Good quarter, gentlemen. Keep up the good work.

Tom Lewis (ph).

Nice quarter. As usual you covered most of the -- covered things pretty well but just a couple of things. How would you describe the recent state of your JT8D market? It is declining, slower, stabilizing, recovering? How would you characterize that over the last couple of quarters?

In one word, recovering and up slightly, not major. But that is about it.

Okay, and the other question I would have, have you seen any indications recently as to whether the manufacturer's list prices that you compete against are trending any differently than in the past? Do they continue to two raise those or is there any change to that tune?

No, you're completely accurate. They do continue to raise them. It is very interesting. A comment that I heard at a conference -- it was actually at the Bear Stearns conference earlier this year and there was a panel discussion where a number of representatives of some of the major airlines and the moderator asked the question as to how do you cut costs, save money on engine overhaul. And the answer was unanimous that the only way is through PMA. The only pricing pressure that we have towards the OEM is through the PMA. And they were in complete agreement with that. So the OEM historically has raised prices.

I believe that they will continue to do so and every indication in the marketplace is that they are doing it. We have not seen any price erosion. And the question was also asked are you seeing -- the same question that you asked, Tom, was asked by the moderator and the answer was no, they were not seeing any price -- and we're not seeing any pricing erosion.

And I can comment that all of the OEM pricing that we have seen effective for '05 are consistent with their past practices. There have not been any changes (inaudible).

Okay, great. Thanks a lot. Keep up the good work.

John Walshausen (ph).

Good morning. A question about the inventory reserve. It seems to me that given the nature of your business probably quarter-by-quarter you are creating some -- you are reserving some against obsolete inventory. What was the event that caused you to make a specific reserve which is large enough to call out?

This is Tom Irwin. With respect to the inventory write-down, it was an amount of $350,000. It is not huge however it was unusual and it related specifically to inventory associated with older generation platforms that as part of our restructuring plan we are deemphasizing and discontinuing the service of again those older generation aircraft components. So in making that decision, we looked at all that inventory and basically evaluated on a resale as opposed to a use basis and resolved it in that $350,000 writedown.

The other question I had was on the SG&A, if I take out the specific items that you characterize as unusual, it still has crept up a tad as a percentage of sales versus last year's quarter. And given that it seems like the revenues were stronger than you would have anticipated, I would have thought they would be some leverage on that. Is there something else that would be helpful to understand that?

Two things, the addition of our microwave productline. That has compared to all our other subsidiaries has a slightly higher component of SG&A versus cost of sales components and then as Larry referenced there was a small increase in general corporate expenses which I think most public companies are experiencing at this point with regulatory and audit and Sarbanes-Oxley and a number of areas like that. But again, they were -- I don't want to overemphasize those but they did have some impact.

But it would be correct to characterize that those were more likely than not transitory rather than an increase in the amount of staffing at corporate or anything of that nature?

That would be true. Our corporate staff size is really the same as it was.

One last question. In understanding the cash flow, it looks as though the minority owners keep the -- let the earnings be retained. Is that by contract or is there some point at which we start to see the minority interest get dividended out to those folks?

I think the answer is that you are correct -- as presented in the cash flow statement, minority interests are added back and then any minority dividends under GAAP are reported under very similar to the Company's cash dividends paid to all shareholders. There were some small amounts paid in the current year, not material enough to highlight in the press release, and relative to the minority interest of the HEICO Aerospace Holdings Corporation, we do contemplate at a point in time that those earnings would be distributed -- the minority interest earnings would be distributed in the form of dividends. To date it has generally been reinvested in acquisitions made by HAHC and specifically we're talking primarily about the minority interest of Lufthansa World Airlines. They have participated in a series of acquisitions. They have reinvested a bunch of that in cash to retain their pro rata share of acquired businesses within the HEICO Aerospace Holdings Corp Group.

Just to comment a little further, and to give you a little more color, I don't want to put words in their mouths, but they feel that their investments through our acquisitions have really done extremely well for them. So I would assume unless there is a major corporate policy change at Lufthansa that they would continue doing that.

So it is a matter of ongoing discussion of how much to dividend out and how much to retain?

I would say that that is accurate, but the major portion of the minority which is Lufthansa -- again unless there is a corporate change in thinking over there, I think they want to continue leaving those funds in to join in the expansion of the Flight Support Group. They've done quite well.

Okay, great. Thanks very much. A great quarter.

Harry Lendbetter (ph).

Good morning. I just wanted to clarify something from your comments earlier. Did you say that PMA sales today exceed their pre-9-11 PMA sales level?

I did.

And that is all PMA sales or only non JT8D?

Total PMA sales.

Okay, and is that on a dollar revenue basis or a unit basis?

Probably both.

All right, thank you.

Well, since it appears that there are no further questions, I am going to thank you all for your interest in HEICO, remind you we are available to answer other questions that we are permitted to respond to. But if you have those questions, you can call any of the 4 of us and we will try to help you out. Again, many thanks and you all have a good day.