HEICO Corp (HEI) 2005 Q4 法說會逐字稿

Welcome to today's teleconference, entitled the HEICO Corporation fourth-quarter, fiscal-year 2005 earnings teleconference call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity to ask questions during our Q&A session.

I would like to turn the program over to CEO, Mr. Laurans Mendelson. Mr. Mendelson, you may begin.

Thank you, Gloria, and thank you all participants. Good morning to everyone on the call. We welcome you to the HEICO fourth-quarter, fiscal 2005 earnings announcement teleconference. I am -- and the script reads I am Larry Mendelson, but I can say I am a smiling Larry Mendelson, CEO of HEICO Corporation. I am joined here this morning by Victor Mendelson, President of HEICO's Electronic Technologies Group and as well as his general counsel of HEICO, and Tom Irwin, HEICO's Executive Vice President and CFO. Eric Mendelson, President of HEICO's Flight Support Group, is joining us via teleconference from Atlanta, where he is out in the field surveying our operations in Atlanta.

But before we begin this morning, Victor Mendelson will read a statement. Victor?

Thank you. Certain statements, which will be made in this conference call, will constitute forward-looking statements, which are subject to risks and uncertainties and contingencies. HEICO's actual results may 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 or requirements, which could cause an increase to our cost to complete contracts; governmental and regulatory demands; export policies and restrictions; reductions in defense or space spending by US 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 risks, interest rates and economic conditions within and outside of the aviation defense space and electronics industries, which could negatively impact our costs and revenues; and HEICO's ability to maintain effective internal controls, which could adversely affect our business and the market price of our common stock.

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.

Okay, Victor, thank you very much. Now before reviewing our fourth-quarter and the full-year operating results in detail, I would like to take a few minutes to summarize what I believe are the highlights of what we consider an outstanding fourth-quarter and a full-year result.

Our fourth-quarter sales and operating income represent record quarterly earnings for HEICO for the third consecutive quarter. Both the Flight Support and the Electronic Technologies Group reported higher net sales and earnings in the fourth quarter of '05, combining for an overall 25% improvement in consolidated net sales and a 28% increase in operating income over the fourth quarter of last year. The higher net sales and operating margins contributed to a 28% increase in consolidated net income in the fourth quarter of '05 as compared to '04 fourth quarter. Full-year net sales and operating income represent record annual results for HEICO.

Our acquisition of Connectronics in the first quarter and Lumina in the second quarter contributed nicely to our fourth quarter and fiscal '05 financial results. In September, we completed our 25th acquisition since 1990 with the addition of HVT Group, a leading provider of very high-voltage interconnection devices and cable assemblies for the medical equipment, defense and other industrial markets.

After year-end, we completed acquisitions of Seal Dynamics and Engineering Design Team. Seal is a leading distributor and designer of FAA-approved hydraulic, pneumatic, mechanical and electromechanical components for the commercial, regional and general aviation markets. Engineering Design Team, which we refer to as EDT, specializes in the design, manufacture and sale of advanced high-technology, high-speed interface products, which are utilized in homeland security, defense, medical, research, astronomical and other applications across numerous industries.

We believe that our operating results and our acquisition successes are a further indication of the progress that we have made towards long-term, sustainable growth at HEICO. As we have said many times before, we consider HEICO a growth company, and we believe that this year's performance continues that trend.

Last week, we declared our 55th consecutive semiannual cash dividends since 1979, raising the per share amount by 60%. In declaring the cash dividend, our goal is to reward shareholders with an increased cash dividend, while retaining sufficient capital to fund our growth objectives.

Drilling down into some of the details, we will first talk about net sales. Consolidated net sales in the fourth quarter of '05 increased by $15.5 million, up 25% from the fourth quarter of '04, reflecting revenue growth of 15% within Flight Support and 48% within Electronic Technologies. For full 2005, consolidated net sales increased 25% to 269.6 million, up from 215.7 in the prior year.

Sales of Flight Support increased 15% to 47.3 million in the fourth quarter of '05, up from 41.2 million in the fourth quarter of '02, and increased 21% to 185.7 million for the full fiscal '05; this was up from 153.2 million in the prior year. The fourth quarter and full fiscal '05 increase in Flight Support's revenue represents all organic growth, reflecting the continued recovery in aftermarket demand within the commercial airline industry as well as our continued success in developing and bringing to market new products and services.

Net sales of electronic technologies increased 48% to 29.3 million in the fourth quarter of '05, up from 19.8 million in the fourth quarter of '04, and increased 34% to 84.1 million for the full fiscal year '05, up from 62.6 in the prior year. The fourth quarter increase in electronic technology revenue reflects strong results from the three strategic acquisitions made during the year as well as organic growth of approximately 11%. Organic growth of Electronic Technologies Group approximated 6% for the full year. Our net sales for '05 by market were comprised of approximately 64% from commercial aviation, 23% from defense and space, and 13% from other markets including industrial medical electronics and telecommunications.

Taking a look at consolidated operating income in the fourth quarter of '05, it increased 28% to 12.8 million, up from 10 million in the fourth quarter of '04. Consolidated operating income for full fiscal '05 increased 37% to 44.6 million, up from 32.6 in the prior year. The operating income of Flight Support increased 19% to 8.2 million in the fourth quarter of '05, up from 6.9 in the fourth quarter of '04, and increased 45% to 35.1 million for the full fiscal '05, up from 24.3 million in the prior year. These increases reflect both higher net sales from organic growth and higher operating margins from improved operating efficiencies despite charges of about 1,000,006 pretax, resulting from airline bankruptcy filings all in the fourth quarter.

Operating income of Electronic Technologies increased 44% to 8.1 million in the fourth quarter of '05, up from 5.6 million in the fourth quarter of '04, and increased 22% to 18.6 million for the full fiscal '05, up from 15.3 in the prior year. This reflects strong results from the previously-mentioned acquisitions and of course the internal growth.

Increases in operating income of Flight Support and Electronic Technologies were partially offset by an increase in corporate expenses, primarily due to increased cost in complying with Sarbanes-Oxley. The accountants have now become our partner.

Operating margins consolidated increased 16.7% in the fourth quarter of '05, up from 16.4 in the fourth quarter of '04, and consolidated operating margins for the full fiscal year increased to 16.6%, up from 15.1 in the prior year. The operating margins of Flight Support increased 18.9% for the full fiscal '05, up very significantly from 15.8 in the prior year, and this was primarily due to the operating efficiencies realized on higher sales volumes. The operating margins of ETG were 22.2% for the full fiscal '05, down from 24.4 in the prior year due to a slightly less favorable product sales mix but were a very strong 27.8% in the fourth quarter of fiscal '05.

Earnings per share diluted increased 25% to $0.25 in the fourth quarter of '05, up from $0.20 in the fourth quarter of '04, and increased to $0.87 for fiscal year '05, up from $0.80 in the prior year. As we have previously mentioned, fiscal '04 net income included a one-time income benefit of $4 million, or $0.16, per diluted share from the proceeds of a key person life insurance policy. Were we to exclude this item from fiscal '04, our full fiscal '05 net income increase is pretty much in line with our 37% growth in operating income.

Depreciation and amortization expense increased to 2.1 million in the fourth quarter '05, up from 1.7 fourth quarter '04, and increased to 7.4 million in '05, up from 6.8 in the prior year. Research and development was 3.1 million in the fourth quarter and 11.3 million for the full fiscal '05 versus 3.7 million in the fourth quarter of '04 and 10.4 million for the full year of '04.

We do have and continue to have great success in the addition of new FAA/PMA approvals as well as the introduction of other parts and products and services through our R&D efforts. We now have over 2,800 parts approved by the FAA that are being actively marketed, and we have accumulated FAA approvals for over 4,000 parts. We are targeting new PMA certification levels in '06, consistent with the levels achieved in each of the last 4 years. And we have a number of new products under development in Electronic Technologies.

SG&A expenses represented 21% of net sales in fiscal '05, up from 20 in '04, primarily due to increased costs to comply with Sarbanes-Oxley. The dollar increase in SG&A expense from 43.2 in '04 to 56.3 in '05 is primarily due to higher sales and the previously-mentioned increased cost to comply with Sarbanes-Oxley. We should have a line in our financial statements for Sarbanes-Oxley.

Interest expense increased to 351,000 in the fourth quarter of '05 from 208 in the fourth quarter of '04. This reflects a higher weighted average balance outstanding under the revolving credit facility as well as higher interest rates. During '05, we borrowed $37 million under our revolving credit facility, principally to fund the three acquisitions previously mentioned. We made repayments in the same period of 21 million, including about 3 million in the fourth quarter of '05.

During August '05, HEICO increased the amount available under its revolving credit facility and further extended the term when we entered into a 5-year, $130 million amended and restated revolving credit agreement. The new credit facility also includes a feature that will allow the Company to increase the facility at its option up to an aggregate of 175 million through increased commitments from existing lenders or the addition of some new lenders.

Interest and other income of 528,000 for full fiscal '05 includes a $276,000 gain on the sale of a small, 50%-owned joint venture in the third quarter. Interest and other income amounts in fiscal '04, other than life insurance proceeds, were really not significant.

The Company's effective tax rate was 37.2% in the fourth quarter and 36.6 for the full fiscal '05 as compared to 36% in the fourth quarter and 29.9 for full '04. The increase for '05 is principally due to the previously-mentioned $5 million life insurance proceeds received in fiscal '04 that were excluded from the Company's income, subject to federal income tax, as well as higher state taxes principally related to recent acquisitions and a lower amount of the minority interest share of income excluded from our fiscal '05 consolidated income, subject to federal income taxes.

Minority interest of 1.3 million and 5.1 million in the fourth quarter of '05 and the full year of '05 and 1.1 million and 5 million in the fourth quarter and full year of '04 principally represent the minority interest held in HEICO Aerospace and the 20% minority interest held in an Electronic Technologies subsidiary.

Our financial position remains extremely strong. Cash flow from operating activities continued strong at 35.8 million for the full year as compared to 44.1 in the prior year, and the decrease is due to a higher investment in inventories required to meet increased sales demand as well as longer lead-times for certain raw materials plus increased accounts receivable due naturally to higher sales levels.

DSOs of accounts receivable remained at 56 days as of October 31, '05, after adjusting for the impact of the acquisition of HVT in September of '05, and this is the same as it was in October 31, '04. We continue to closely monitor receivable collection efforts in order to manage our credit exposure.

The inventory turnover rate increased to 132 days as of October 31, '05, after adjusting for the acquisition of the HVT Group. And this is up from 125 days as of October 31, '04, and it reflects the previously-mentioned higher investment in inventory required to meet sales demand as well as some lead-times.

Our working capital ratio remained very strong at 2.5 as of October 31, '05, down slightly from 2.9 as of October 31, '04, and our leverage continues to be very, very low. No one customer accounted for more than 10% of our sales. CapEx in full fiscal '05 were 4.8 million; this was net of 3.5 million in proceeds from the sale of an excess facility.

Looking into the crystal ball to fiscal '06 and beyond, we do believe that increasing product demand from customers as well as our commitment to develop new products and services plus our strong financial position and our ability to identify select acquisition opportunities provide the foundation for continued growth in sales and earnings. Based on current market conditions, we are targeting fiscal '06, 12-month net sales growth in the range of 30 to 35%, operating income growth in the range of 35 to 40% over 2005. We also are targeting fiscal '06 diluted net income per share in the range of $1.05 to $1.09. These targets include our recent acquisitions but exclude the impact of additional acquisitions, if any.

I'm going to give a little explanation here for the technical analysts on the call and point out that the targeted net income per share percentage growth is slightly less than the targeted net sales and operating income percentage growth. And this is primarily a result of the expected impact of the minority interest share of income in less than wholly-owned subsidiaries -- more specifically the recent HVT Group, which is 85% owned, and Seal Dynamics, which is 51% owned. That is a technical explanation. And if people need more color in that, if you don't understand it, Tom Irwin will give you more color later.

Overall, we are targeting organic revenue growth at approximately 10% for the entire Company. We do expect Flight Support to be higher than the 10%. And Electronic Technologies, as we have previously said, will be slightly less. Fiscal '06 cash flow from operating activities should approximate 42 to 45 million and CapEx budget for '06, 12 to 14 million.

We continue to target improvement in consolidated operating margins, which improved from 15.1 in '04 to 16.6 in '05. But further improvement is likely to be at a slightly slower pace due to the acquisition of Seal Dynamics. And Seal Dynamics is a leading distributor of FAA-approved products for aviation markets and is expected to realize lower operating margins than the balance of the Flight Support Group. We do expect Seal Dynamics to be accretive to our earnings.

In closing, HEICO continues to adhere to a long-term strategy of developing and marketing new products and services, which provides our existing customers with improved technology and substantial cost savings and allows us to expand our markets. We believe that this strategy has resulted in our strong financial position and also positions us with the opportunity for substantial forward growth. We do remain confident that our disciplined business model will provide for long-term and sustainable growth.

That is the extent of my prepared comments. I would like to now open the floor for Q&A. Gloria?

(OPERATOR INSTRUCTIONS). Arnie Ursaner, CJS Securities.

Good morning. Congratulations on a very good quarter. A couple questions I have -- obviously, you have made a number of acquisitions. And in trying to build the model, I guess the first question I have is -- can you give us your best sense of the pro forma actual revenues for '05 building in all of the acquisitions you have made?

Pro forma for '05?

For '05, meaning you have made a number of acquisitions that even closed at the end of the year (multiple speakers). I am trying to assess your -- you have indicated 10% -- I am going to call it organic growth.

Right, I understand the question. I understand.

So the midpoint of your 30 to 35% growth versus reported is about 355? I am trying to get a best sense of a pro forma number to compare that 355 to.

I'm going to ask Tom Irwin to respond.

This is Tom Erwin for (indiscernible). As we have not and don't expect to disclose pro forma '05, but relative to our targets that we have explained and using just for ease of numbers the low range of our sales estimate at 30%, the 350 million and our estimated organic approximate growth of 10%, you wind up with about roughly one-third of the revenue increase being organic growth and roughly two-thirds being acquired growth. So on a pro forma basis, acquired revenue for '06 is -- when you do the math -- is somewhere in the 50 million range.

A couple of other follow-on mechanical questions. Can you give us your tax rate guidance embedded in your EPS for '06?

I think given what we have disclosed, you can kind of back into it if we hit our targeted EPS, the net income numbers and our operating income numbers with the other variables being interest expense, minority interest and tax rate. As Larry mentioned relative to the net income percentage increase, the impact of minority interest -- a couple of these minority interests are in LLC's nontaxable entity. So as a result of that inclusion, we do expect our tax rate to decline around 1%, 100 basis points (technical difficulty). This year, it was around -- which would bring it down to about 35.5 versus this year's 36.5 if the trend of our minority interest (technical difficulty).

Two more mechanical questions, maybe you can help me. In your other expense line, you indicated Sarb-0x. Just remind us again of the 3.5 million of other, how much of that is Sarb-Ox and what do you think it will be in '06?

Relative to our Sarbanes-Oxley costs, as we have mentioned, our SG&A number went up about 1%, which equates to on an annual basis roughly 2.6 million or 2.7 million of SG&A, which we principally identified as the increase in Sarbanes-Oxley cost. Now relative to Sarbanes-Oxley hard numbers, there is a lot of judgment as to -- how much is incremental, how much you would have occurred, how much internal audit time would have been spent on something else, etc., etc. For sure, we have identified the 2.7 million approximately of incremental Sarbanes-Oxley cost. I think what we have seen and read for our sized Company, it varies anywhere from 2 million to 3 million.

Going forward to next year, obviously, we don't have a hard number on that within our estimates. What we are expecting is that it will come down. We read a number of recent publications and discussions that indicate that companies are hoping to lower Sarbanes-Oxley costs roughly 20 to maybe as much as 40% for next year, but it's a little uncertain at this point. But our range of estimate is considered obviously in our targeted earnings for next year.

Final question if I may on your ETG Group, you had been discussing a technical issue on a single complex black box problem that has been impacting your margins for the last several quarters. And we obviously saw a very big improvement this quarter, but we also had a lot of acquisitions. Can you be -- more specifically comment on where you are on that technical issue? And did it in fact contribute materially to your margin in ETG in the quarter?

I'm going to ask Victor to respond to that.

Thank you, this is Victor. The answer to your question is yes. We're not completed with all that we have to do there, but it'd make an important contribution.

Chris Quilty, Raymond James & Associates.

Congratulations on the nice results. Just as a follow-up on the prior question, can you give us a sense with the mix of businesses that you now have in the ETG group what you think the sustainable operating margins are in that business?

I have to be (technical difficulty) very careful because I do not want to say anything that we haven't already said publicly because of Regulation FD.

No, you are on a conference call; you can say anything.

But I think the bottom line, we have said before and I have said it publicly many times, is that I am pretty comfortable with the levels we are seeing now. And I think we will see them vacillate as we did last year, and there's no linear function to it really.

Well, I mean just looking back over the last 2 years, you've been in the range of 22 to 24%. Is this sort of low 20s the target range?

Yes, I think that's probably good. Of course, I tell Victor with those numbers, I say -- why aren't you at 42 to 44? And he's (technical difficulty) to do. But you know, the range that you've seen over the last few years is doable. As you know, I pushed to have everybody do better. But realistically, I think those are good ranges.

Let me say this that I think that does kind of -- mid to lower 20s seems to be an area, which you have seen over time, we have kind of been enable to get into. So I feel comfortable with those. Of course, that is absent some exogenous events, extending circumstances, some major change in defense budgets or programmatic changes or governmental changes or anything like that. But right now, I'm pretty comfortable with it.

Just in terms of the actual operations, they are somewhat disparate in both the products that are carried within the ETG group and certainly the geographic locations. Are there any specific plans that you have targeted towards trying to integrate, consolidate, get synergies out of the acquisition that you think might push the margins higher on a go-forward basis?

There are efforts to do that, but I would not look for any major results from them. We do that, and it is a continuing effort and there are opportunities in pockets. But I wouldn't look for that to be where we score a homerun so to speak.

Chris, one other comments in managing a business like the ETG side of the business, we have to make a basic decision whether or not to really interfere with the entrepreneurial spirit that drives these companies to achieve very high margins. And as Victor points out, there are some opportunities to reduce expense in some areas. But if it ain't broke, we really don't want to fix it too much. We think that the margins that we are doing in ETG are outstanding, and we are trying to ratchet it up a little by cost saving.

But as Victor says, I don't think we're planning on major increases. If it happens, again, I told you I push everyone to try to ratchet it up. But I don't know if that is really in the cards. We think it's excellent and the cash flow is spectacular and the margins are fantastic, so probably the answer -- it is unlikely.

Chris, if anything, synergies would help to accelerate growth. But I'm not committing that that will happen; I want to be very careful. Just if anything, that's where the synergies would really I think do the most.

Okay, on a go-forward basis, you guys are always active on the acquisition front. Is it fair to assume that most of the opportunities you are seeing are within the ETG, rather than the Flight Support Group?

Not necessarily, not necessarily. We are on both sides. You know, first, you have in size and then you have a number of acquisitions, so there are two different issues there. I would say we are seeing opportunity on both sides or both parts of our business. And yes, both of them.

Okay, with regard to the overall guidance for '06, you're endorsing about 10% organic growth. But if I look back over the last 2 years, your organic growth has been more on the order of sort of a mid-teens growth rate. Is it fair to assume that you are not necessarily seeing the business slow down, but you are just trying to put out reasonable guidance on a go-forward basis and leave some room for upside? Or how do you feel about the state of the overall commercial aviation industry and some of the other end markets you serve?

On the state of the overall industry, obviously, it's all over the newspapers between Boeing doing extremely well, Airbus and the aviation industry as such. I think it's very, very strong. I was at an AIA meeting in mid-November; all the CEOs and CFOs were very upbeat about the outlook. Everyday, we pick up the news of a paper, and it's great. So I think that it's very positive; the industry is in the right place. The industry is doing well, and we don't see any change in that.

As you know, we don't give out a quarterly guidance, and that's because we can have some lumps and bumps in ETG. Sometimes, we can have the same thing in Flight Support. You get a big shipment at the end of the quarter or the beginning of the following quarter and so forth.

But for the full year, we have given guidance, which we believe is prudent and wise and very realistic. If we did a curve on the likelihood of us doing better, I would say that optimistically because I shoot -- if we say we're going to grow 25 or 30 or whatever we say, you can't have that as a target because all kinds of stuff happens. So you have to aim higher. Sometimes when you aim higher, you get there and you surprise yourself.

So we have ingrained in our organization, in our bonus calculations, our people are highly motivated through their compensation to exceed their own budget goals. Now will that happen? I don't know; I hope it happens. And then as the year progresses, as we go into the year, we will change the guidance. And hopefully, we can change it up. But at this point, the most prudent, the best guesstimate that we can make is the one that we have done, Chris.

Fair enough. If you look at the factors that are going to influence the growth rate next year both positive and negative, what are the things that would give you concern -- continued outsourcing to the engine OEMs that kind of restricts your ability to sell parts versus the ability to sign other strategic relationships with airlines and potential bankruptcy of some customers. Where do you think you're going to get the biggest upside or the biggest risk to the downside?

I'm (technical difficulty) ask Eric to respond to that because he's closest to the ground on that. So Eric, could you respond to Chris?

Hi, Chris, this is Eric. In response to your question, we're doing very well with coming out with many new products, and we are at a similar level of new product introduction for the last number of years. So our customers are used to receiving many new parts from HEICO, new savings opportunities, and that is powering the growth going forward.

In addition, there are additional partnership opportunities for us and additional customer opportunities. Although, 16 of the world's top 20 airlines fly HEICO parts, and really the other 4 buy either our distribution or our repair services. There are additional opportunities. I think as HEICO's reputation continues to prove out there in the industry, we are going to pick up -- go ahead and continue to pick up additional customers. So we are going to do it in all fronts -- new products as well as new customers and possibly new partners too.

With regard to concerns on the bankruptcy size -- or bankruptcy issues that may arise next year, how well do feel you are reserved with your customers?

I think we are pretty well reserved with our customers. Hopefully, the bankruptcy issues, the vast majority of them are behind us right now. We are hopeful that going forward, we should be in pretty good shape with respect to bankruptcies.

Congratulations again on the great results, and keep up the good work!

Chris, thank you. I can mention that I read your note this morning, and we thank you for the added confidence on your research note. Thanks very much.

JB Groh, DA Davidson.

Congratulations on a great year. Just addressing the PMA approvals for the year and sort of what you're looking at for 2006. Has kind of the dollar content potential of those parts remained constant over the past few years with the new engine programs that you're introducing or has that gone down or has that remained stable?

I would say it's fairly consistent. Of course, there's just natural fluctuations. Some parts have greater sales potential than others. But in terms of the number of PMAs as well as the market potential for those PMAs are all pretty constant -- I would say consistent over the last 4 years; that would be '05, '04, '03 and '02. '01 was a little bit below that number; it was probably about two-thirds of the level we have been at for the last 4 years.

But there are continued opportunities both on the engine as well as the non-engine side. For years, we were known as an engine parts Company, but there are all sorts of other products on that aircraft that we now have a lot of content on.

And in terms of the -- what is it roughly 300 approvals plus or minus you got this year? What is the breakdown there between engine and non-engine?

It would probably be somewhere around 60% engine and 40% non-engine.

In terms of -- I know we addressed acquisitions a little bit -- in terms of the pipeline of potential deals, how is that looking? How are you feeling about multiples now versus say 12 to 18 months ago.

Eric, I will respond to that. The answer is multiples asking prices have gone up. As you know, it is our policy not to pay huge multiples. We would like to pay between four and six times. We also focus on singles and doubles, not homeruns. This does not mean to say if we saw a spectacular opportunity that was right up our ally and we did the homework and due diligence and everything else, that we might not reach for it. But it probably is unlikely that we are going to stretch and pay 10 and 12 times EBITDA multiples; it's just not our style. We focus more on bottom-line growth, cash flow, and we don't want to grow to be big. But when we see opportunity, then we have the financial capability to snap it up. So does that answer your question?

Yes, it does. In terms of kind of a long-term strategy, some of these deals where you acquire x% and there is still the minority interest hanging out there, what is the long-term strategy there in terms of an exit for the prior owners? Do you have a strategy of maybe buying that remaining interest or how does that--?

The answer is yes. We like to initially encourage that partnership arrangement, so the prior owner has skin in the game. And also, it is a way for them to really grow the business using some of the benefits that we bring to the table -- financial benefits, marketing know-how and so forth. So the long range is probably at some point in time to acquire those interests over time and to provide an exit strategy.

That also gives us a couple of benefits. Number one, as the Company -- as the acquisition target grows, we can also help to influence the management replacements. So if an entrepreneur has sold us a company and owns a minority interest in it, over time, he and we can work together to find his replacement. So we get a very good transition, a very healthy transition, and that is the principal strategy. Number two, it does help as the business grows under the management of the former owner, it enables us to actually pay him more because he is growing the business and it gives us a much higher level of confidence that what we bought will really produce and add to our bottom-line. So it's a strategy that we like, and we have done in a few instances.

Sounds like a good plan. I thought you were just doing it to make the modeling more fun for the analysts, but -- okay, hey, thanks a lot guys.

Chris Donaghey, SunTrust Robinson.

Good morning, guys, an excellent quarter.

Thank you, Chris; good morning.

Larry, I want to kind of try and dig a little bit deeper. I know we kind of went into this into some detail with Chris's questions about just growth outlook going forward. But this quarter in particular, organic growth in the Flight Support Group was 15%. But yet, when you look at the traffic data for that quarter, the August, September, October timeframe, the number of departures was down 4% domestically and about 3% internationally. So if there aren't as many aircrafts taking off and landing these days, where is that incremental growth coming from? Is it coming from market share penetration? Is it coming from new customers? Is it coming from the services side? Can you just help me get to an understanding of what's going on and what the drivers are of that growth in this quarter?

I think I can. Firstly Chris, our growth is not directly related to the -- by quarter, it's not related to the number of planes taking off or landing. As a matter-of-fact, very often when fewer planes take off, they come in for overhaul. And our business can go up when the number of flights are down because they don't need the aircraft to run, and they can overhaul the plane. So that's one of the things.

The second thing, we don't give quarterly guidance, and this is a great example of why. Because we cannot predict. We can pretty much predict over a year. And over 3 years, we have a very good idea because those aircrafts have to come in and they have to get overhauled at some period in period. But when the airline -- some airlines have cash, some don't have cash, some have planes backed up.

So you really can't correlate that closely. We can't correlate that closely to determine that correlation. It just doesn't work. We've tried many times, but it just doesn't work. But over a period of time, we know on a macro basis that more airplanes flying, more takeoffs and landings, more hours, more parts -- and as I say, over a year and 3 years, we have an excellent idea. In a quarter or a month, it's very difficult.

This is Eric, also, I'd like to add to that. We continue to see our market penetration and market share increase. As we develop new parts and those new parts are on the new aircrafts out there in service, our market share will continue to go up even -- I believe even if the number of takeoffs and landings remains flat -- so, as we have just continued to build the business.

Can you give us a rough sense then where that current market share stands?

It's very hard to do because it depends on how you define the market, and the numbers are very confusing as to what you look at, whether it is engine or airframe controls and accessories, parts, new generation, old generation. So it becomes very difficult to do. I don't have those -- we do have some estimates; I don't have them here in front of me right now, so I wouldn't feel comfortable stating what they are.

Chris, there's one other thing -- issue here that when we talk about market share -- in the overall market of 5 billion -- let's say the engine parts are $5 billion; you know, maybe our share is less than 2%. On the other hand, if you drill down and you look at an individual part -- because we only -- as we said, we are selling 2,800 different parts that is the active inventory right now. We may have a very high percentage, a very high percentage of those sum of those parts individually.

But at one time -- I don't want to give you competitive information -- but as an example with combustors, we had well over 50% of the market. On some JTA product, maybe we had more than that. But on the overall market, it might be 1 or 2%. So those numbers are hard to -- again, the correlation is a little confusing.

No, that definitely helps though.

The market is just so vast.

It definitely helps though. Can you mention the number of PMAs added by the Seal Dynamics acquisition?

I don't know if we have given -- I will toss that over to Eric.

We haven't released that. We would, but I don't have that information in front of me right now; I'm on the road. But it is probably in the neighborhood of about 100 to 200 PMAs.

One other question -- the split of the '06 growth between the Flight Support Group and the ETG, now, I understand the organic growth side. But if we look at the Seal Dynamics acquisition and what it is going to add to Flight Support Group versus the two ETG groups, is it going to be skewed more towards the Electronic Technologies Group, where that incremental 20 percentage points comes from in '06?

This is Tom Irwin (technical difficulty). Relative to (technical difficulty).

He's cutting in and out. It's better now though.

What I was getting ready to say is the breakdown by Flight Support Group, ETG Group -- in '05, final numbers revenue was 69% Flight Support Group, 31% ETG Group. As we look towards (technical difficulty) '06 and the foreseeable future, we don't see any material change in the mix between business segments.

One last question and I apologize if this is obvious. But the $1.5 million charge for airline bankruptcy, can you just walk me through how you get that number, how it impacts you?

I think it was 1.6 and --

Yes, 1.6. Some of it was in the Flight Support Group, so we would after tax -- (multiple speakers) a minority interest, which is 80% of it. Then part of it was in the ETG Group, where the after-tax would be whatever roughly 60% of the number or something like that.

Right off the (technical difficulty) most of it, most of it (technical difficulty). Most of it will be impacted at -- it impacts us pretax at 80% because of the minority interests of Lufthansa, and most of it is in the Flight Support. And then after that, take 80% and it would after tax (technical difficulty). Did you hear what I said?

I think I understand it. I got the gist of it. Thanks a lot guys and an excellent quarter.

Kerry Ledbetter (ph), Friedberg Investment.

I want to follow up on that most recent question on the 1.6 million and how that works its way through the income statement kind of above the operating income line. Does that charge only show up as they hit against cost of goods, or does it also affect revenues?

Our provisions for basically doubtful accounts that are set up for receivables are a component actually of SG&A expense, and it does not impact revenue. We simply (technical difficulty) increase a reserve for bad debts. And again, a corresponding charge to that is in the SG&A line.

Then historically as I look at your past results, usually the fourth-quarter FSG results are a little bit higher than the third-quarter results. But there is a significant drop this quarter, and I was wondering if there was anything unusual in the third quarter that made it -- the revenues that quarter exceptionally good. I am just trying to get a sense for what the dynamics are there.

I'm going to ask Tom Irwin to talk to you about that.

And Eric may want to add some more color. Just recalling back on -- we had our third-quarter conference call; we made reference to the fact that at the time that the third quarter was so strong in Flight Support Group -- that at the time, we said that our expectations for the fourth quarter, while it may be down relative to third quarter, was going to be up significantly -- up over the fourth quarter of last year, which it was about 50%.

So I think the answer is, it wasn't so much that the revenue in the fourth quarter of the FSG was less than our expectations but rather that the third-quarter results, as referenced again in our third-quarter conference (technical difficulty), was just very, very strong.

Right, I remember you saying that. Do you have a sense for what happened? I mean do you have any visibility into the cause?

This is Eric. Just very strong orders in the third quarter. There were a number of customers, who wanted parts at the end of the quarter, and we satisfied their demand. It can fluctuate from quarter to quarter. Sometimes, the orders can get a little bumpy depending on when their restocking is or what their inventory levels are. Sometimes, they want to hold very little inventory at certain dates, or they don't mind holding a little more inventory at other dates. But this is all customer driven POs, and we just basically react when they come in.

That makes sense, and that's very helpful. Then, my last question is about Seal Dynamics' distribution business. I was wondering if you could give us any direction on -- as far as their whole business, how much of that shakes out between their own parts and parts of their distributing for other people? And are the parts that they are just distributing, are some of those OEM parts or what is the nature of those relationships?

This is Eric. I will go ahead and answer that. We have not broken out what percentage of their sales are their own PMA parts versus distribution for competitive reasons. But they do of course have their own PMAs primarily for controls and accessories and airframes, a little bit on engines but mostly on the former. And they do a lot of distribution for many different well-known names in the aviation industry.

The business that they are in is different than some of the larger distributors in that it is more of a technical sale, explaining to a customer why they should move from one product to another product. It is not a big distribution house like some of the other very well-known companies, which provide a very needed service and handle lots of products but really differentiate themselves on their ability to distribute the large quantities. This is a more of a niche distribution business, where it can really add value to its customers by helping them switch from typically one OEM-approved product to another OEM product -- OEM-approved product.

Sometimes, the aircraft manuals will stipulate a number of different providers of a particular part, and Seal Dynamics is really able to add value by finding those opportunities and helping on a technical perspective -- convince the airline what they need to do.

Tyler Hojo, Sidoti & Co.

I don't know if you guys answered this already, but did you say how much stock option expense was baked into your forecast for F'06?

We didn't make reference specifically to it. What we can say is it is impacted. In other words, it is reflected obviously. We will be under the timing of the new expensing stock option accounting rules. They will impact beginning the first quarter of '06, so they are reflected in our targeted numbers' earnings diluted per share net income. And the amount, as previously referenced, is not material.

Just going back a little bit into Seal Dynamics, those entering kind of the distribution portion of the market, is that going to help with some of the lumpiness that you have mentioned within the Flight Support Group going forward? Or what are your thoughts there?

I'm going to ask Eric to respond that.

I would say not really. I would say the characteristics that drive the Seal Dynamics business are very similar to the characteristics that drive our Flight Support Group. While Flight Support can be a little lumpy quarter to quarter, it tends not to be very volatile. We don't have typically a huge quarter followed by a much weaker quarter, but there are just natural fluctuations in that area. But it should be similar to what we have done historically.

Gloria, are there anymore questions?

We have no further questions, sir.

Well, I again thank you all for your interest in HEICO and for being with us on this conference call. All of the management at HEICO wishes you all a happy, healthy holiday season, a wonderful new year. If you do have questions, we are available and we will be responsive within the limits of FD. So thank you again. And we will talk to you, if not before, at the first quarter '06 conference call. This is the end of this conference call. Thank you.

Thank you for your participation. You may disconnect at any time. Have a wonderful day.