HEICO Corp (HEI) 2007 Q1 法說會逐字稿

Welcome to HEICO Corporation's fiscal 2007 first-quarter earnings results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I would now like to introduce our host for today's call, Laurans Mendelson. Mr. Mendelson, you may begin.

Thank you very much, Erica, and good morning to everyone on this call. We started a couple of minutes late, for which I apologize, but there were some calls coming in and we wanted to give people a chance to listen to the full conference. This is the HEICO first-quarter fiscal '07 earnings announcement teleconference and of course I'm Larry Mendelson; I'm the CEO of HEICO Corporation. And I'm joined this morning by Eric Mendelson, who is President of HEICO's Flight Support Group and Victor Mendelson, President of HEICO's Electronic Technologies Group as well as General Counsel. They are both on a remote hookup because they are traveling. And here with me in my office is Tom Irwin, HEICO's Executive Vice President and CFO. Before we begin I would like to ask Victor Mendelson to read a statement.

Thank you very much. Good morning. Certain statements made in today's conference call will constitute forward-looking statements which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors, including but not limited to, lower demand for commercial air travel or airline fleet changes 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 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 price 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 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 today's 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. Before reviewing the first-quarter results in detail I would like to take a few moments to summarize the highlights.

Number one, both flight support and electronic technologies reported higher sales and earnings in the first quarter of '07 versus '06 and combined for an overall 29% improvement increase in consolidated sales and a 12% increase in consolidated operating income over the prior-year first quarter. The higher sales contributed to a 17% increase in consolidated net income over the prior year's first quarter.

Our consolidated first-quarter net sales and net sales of flight support represent record quarterly results. In January, we paid our 57th consecutive semi-annual cash dividend since 1979. And January 2007 marked the 50th anniversary of the incorporation of the Company. During the past 50 years this Company has grown from a startup business to become a leading designer and manufacturer of critical aircraft, space, defense, medical and other components used in high reliability environments around the world. We believe that our continued commitment to developing and marketing new products and services along with strategic acquisitions can and will propel long-term sustainable growth at HEICO over the next 50 years.

I would like to point out that since 1990, which was the time that my management team took over HEICO, sales and net income have grown at a compound annual rate of 19% and the stock price has grown at a compound annual growth rate of 23%.

Moving on to the details of our first-quarter report, consolidated sales -- net sales -- in the first quarter of '07 increased by $25.6 million, up 29% from the first quarter of '06, reflecting revenue growth of 38% within Flight Support and 5% within Electronic Technology.

Net sales of Flight Support increased to a record $88.1 million in the first quarter of '07, up 38% from $63.7 million in the first quarter of '06. The increase in Flight Support revenue represents the acquisitions of Arger Enterprises in May of '06, Prime Air in September '06, as well as organic growth of approximately 18%, and we think that's pretty good. The organic increase in Flight Support revenue reflects our success in developing and bringing to market new products and services and the continued increased demand for aftermarket replacement parts and repair and overall services within the commercial airline industry.

Net sales of Electronic Technologies increased $25.6 million in the first quarter of '07, up 5% from $24.5 million in the first quarter in of '06, and this reflects the organic growth consistent with our near-term expectations. Overall, the consolidated net sales increase of about $26 million in the first quarter of '06 over the prior year represents approximately $15 million attributable to organic growth and $11 million attributable to acquisitions.

Our consolidated operating income in the first quarter of '07 increased 12% to $17.1 million, up from $15.3 million in the first quarter a year ago. Operating income of Flight Support in the first quarter of '07 increased 24% to a record $14.4 million, up from $11.6 million in the first quarter of '06 and this of course reflects higher net sales.

Operating income of Electronics Technologies in the first quarter was $5.8 million, down slightly from the $6.4 million in the first quarter of '06. This reflects product sales mix within the companies of that division.

Corporate expenses in the first quarter of '07 were $3 million versus $2.7 million in the first quarter of '06.

Operating margins of Flight Support were 16.4% for the first quarter of '07 versus $18.2 million for the first quarter of '06, and this reflects product mix. The Flight Support's first-quarter operating margin of 16.4% did approximate the Flight Support Group's full fiscal 2006 operating margins of 16.9%.

Margins of Electronic Technologies were 22.5% for the first quarter of '07 versus 26.2% in the first quarter of '06, and this reflected product mix.

We've commented before many times on Electronic Technologies' operating margins that they may vary somewhat from quarter to quarter based on the timing of product shipment and product mix. And based on the current backlog of unshipped orders within Electronic Technologies, which have increased to $56 million as of January 31, '07, up 23% from the backlog on October 31, '06. We expect higher quarterly sales and operating margins for the balance of fiscal '07.

Consolidated operating margins were 15.1% for the first quarter of '07 versus 17.4% for the prior year, principally reflecting decreased gross profit margins, partially offset by improved operating efficiencies and lower SG&A expenses as a percentage. For the full fiscal 2007 year, we expect operating margins within electronic technologies to contribute to an improvement in consolidated operating margins during the balance of fiscal '07.

Earnings per share diluted increased 15% to $0.30 in the first quarter of '07, up from $0.26 in the first quarter of '06. Depreciation and amortization expenses increased to $2.7 million in the first quarter '07, up from $2.1 million in the first quarter '06, primarily due to increased amortization of acquired intangible assets relating to recent acquisitions.

Research and development expense was approximately $4 million in the first quarter of '07 compared to $3.8 million in the first quarter of '06. The addition of new FAA PMA approvals continues to be critical to our long-term growth, and we spend accordingly. We now have over 5,000 parts approved by the FAA and new parts released by our R&D group in the first quarter of '07 continued at a strong level and generally as planned for the period. We are targeting a range of between 350 and 400 new PMA certifications in 2007.

We also have new products under development in Electronic Technologies. And I've mentioned many times before and I will say it again, we strongly believe that our focus on continuing new product development is fundamental to our growth strategy and that strategy has proven very effective over the years. We see no reason for that strategy to change.

SG&A spending as a percentage of net sales decreased to 17.9% in the first quarter of '07, down from 19% in the first quarter of '06, principally reflecting efficiencies through cost controls and increased sales volume.

The increase in SG&A expense in dollars to $20.3 million for the first quarter of '07, up from $16.8 million in the first quarter '06 is principally due to higher operating costs, principally personnel-related, including the impact of the Arger and Prime acquisitions, as well as increased sales.

Interest expense in the first quarter of '07 was $849,000 versus $808,000 in the first quarter of '06. This was due principally to higher interest rates offset by a lower average balance outstanding under our revolving credit facility. Our interest expense is quite low and that reflects of course the Company's low leverage ratio.

Interest and other income in the first quarters of fiscal '07, '06 were really not significant.

The Company's effective tax rate of 30.3% in the first quarter of '07 was down from 34.1% in the first quarter of '06, and the decrease is principally due to the benefit of an income tax credit for qualified research and development activities the Company recognized in the first quarter of fiscal '07 or the full fiscal '06 year, pursuant to the retroactive extension in December '06 of the underlying provisions of the Internal Revenue Code.

The fiscal '06 tax credit, net of expenses, increased net income by approximately $300,000 or $0.01 per diluted share in the first quarter of '07. In addition, the higher amount of minority interest share of our income, which is excluded from the Company's income, subject to federal tax, also contributed to the lower effective tax rate in the first quarter of '07. And for those of you who don't understand what I just said, which is very complicated, I'm sure Tom Irwin in the Q&A session will be able to elaborate on it.

Minority interest shares of consolidated income was $3.6 million in the first quarter of '07 and $2.8 million in the first quarter of '06. Minority interest relates principally to those interests held by Lufthansa and Flight Support and in certain other subsidiaries of Flight Support, including Seal Dynamics and Prime Air, as well as the minority interest held in Sierra Microwave and HVT in the Electronic Technologies Group. The increase in the first quarter from the first quarter of '06 is principally attributable to the higher earnings within the Flight Support Group.

Our financial position remains extremely strong. Cash flow from operating activities in the first quarter totaled $3.1 million, down from $6.3 million in the first quarter of '06 and the decrease is principally due to a higher excess tax benefit from stock option exercises and that's presented as a financing activity. It's a complicated presentation and if you look on the cash flow statement you will see it is actually taken out of operating and put down in the financing activities. And if that didn't happen, your cash flow would've been significantly higher. Cash flow from operations would have shown significantly higher. The total cash flow, that doesn't change.

Our working capital ratio strengthened even further to 3.6 as of January 31 versus 2.7 in October 31, 2006. DSO's of receivables equal 54 days in January '07 and October '06. We do monitor receivable collections very carefully and we manage this credit exposure, I believe, quite well.

The inventory turnover rate as of January 31 dropped to 120 days compared to 142 days as of October 31, '06. That is a significant improvement. The inventory levels at Flight Support have increased slightly since October '06, and that is attributable to higher number of new parts being developed and increased leadtimes on some raw materials. But overall, turnover rates have improved.

No one customer accounted for more than 10% of our sales. And our top five customers represented approximately 22% of consolidated net sales in the first quarter of '07 as well as the first quarter '06.

Long-term debt to capitalization increased slightly to 15.3 versus 14.8 on October 31, '06. This reflects the net year-to-date borrowing of about $5 million under our credit facility and the leverage of course still remains extremely low.

CapEx in the first quarter of '07 was $2.7 million and our net capital expenditures for the full year we project at approximately $18 million.

As far as our outlook, the balance of fiscal '07 and beyond we think that the commitment to develop new products and services, increasing product demand from customers, strong financial position and our ability to identify good, select acquisition opportunities, provide the foundation for continued growth in HEICO's sales and earnings.

Based on current market conditions, we are raising our targeted fiscal '07 net sales to a range of $466 million to $471 million. Operating income to a range of $80 million to $81 million. Diluted net income per share to a range of $1.38 to $1.40. These targets of course exclude the impact of additional acquisitions, if any. We continue to target fiscal '07 cash flow from operating activities in a range of 50 to $54 million.

And in closing we do continue to adhere to the 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 this strategy has resulted in our strong financial position and also positions us with the opportunity for substantial forward growth. We remain absolutely confident in a disciplined business model and we believe it will provide opportunity for long-term, sustainable growth.

That is the extent of my prepared comments. And I would like to ask Erica, who is helping us on the phone, to please open the floor for questions.

(OPERATOR INSTRUCTIONS). Arnie Ursaner, CJS Securities.

A couple of quick questions. First one for Tom. Tax rate guidance for the year, please.

For the full year, we continue to look at the 33% to 34% range. The first quarter, of course, was in the 30% range but, we had the onetime tax credit reduction. If you add that back, you get closer to 33%, 34%. So overall we are somewhere in that range.

In Q1 how many new parts were you able to get out in the marketplace?

This is Tom. I will defer to Eric but I don't think we disclose specific introductions by quarter historically for competitive reasons.

Arnie, I think a general comment and Eric can either confirm or deny this, but one, I agree with Tom. Two, I don't think there was anything unusual in the first quarter that would skew it one way or the other. I think it's pretty much business as usual. Eric, what do you think?

That is correct. It -- the results were consistent with our expectations and forecasts, and consistent with what we've done in the past and it spread throughout the year according to a plan and we're on track for that.

Final question for me at this stage would be on the Electronic Technology Group. This is the second quarter in a row where you've had a little bit lower than what I would call trend line revenue growth. And obviously there's some backlog building. Perhaps, if you could step back and while I understand there's always been lumpiness in the buildings, perhaps your view of why, over the last six months, what is causing some of this lumpiness? Is it particular programs or any specific issue? Obviously, your backload would indicate it's going to get better and your guidance would indicate it would get better. But I would like to try to get a better feel for what has been impacting the last two quarters in that segment.

Arnie, this is Victor. The answer to the question is, we always guide people to expect mid-single digit organic growth out of ETG and I would continue to do that. Particularly the lumpiness recently has related to for the most part technical issues we're having in some defense products that are just kind of basic research that were just not exactly where we need to be at. And this quarter, it's coupled with sort of call it a perfect storm, where in between some programs that, some winding down while others are waiting to spool up. And we don't see any problems in those programs. The orders remain there, as you see in the backlog. But it's the combination of those two would be probably the largest single contributor.

And second in the quarter in one of the operations, we had a very large high-profit or rather high revenue shipment to a customer that came in to do its ATP or its acceptance and test procedure. They schedule it at the end of the month. And unfortunately, they didn't finish it until the first few days of February. It just slipped.

So, and by the way, that's kind of typical. We do see that sort of lumpiness fairly regularly. Those are really the drivers, the primary drivers, in the quarter. We always have businesses that are a little up and that are a little down and that's going to continue in the normal ebb and flow. But those are the principal reasons.

Given the sizable ATP issue, had that occurred with the revenue growth -- would that, in and of itself have changed the percentage growth by a few percent?

I'm not sure exactly and I don't know we want to drill down for a variety of reasons, for competitive reasons, in our customers and so on -- some relationship reasons. But the bottom line is, it would have changed the growth. It definitely would have changed the growth.

Christine Min, Calyon Securities.

With regards to the $56 million backlog, could you address what is the average time it takes for the backlog to be converted into revenue usually?

This is Tom Irwin. Generally, all our backlog ships within 12 months. Obviously, some of it six to eight months, some of it less. And as we mentioned, overall it's up about 23% from the end of the year. And that again reinforces the comments that Victor made relative to what we expect the remaining portion of the current fiscal year. Actually, our order flow, that is first-quarter incoming new orders versus first quarter last year was up a comparable percent as well. And that is reflective of Victor's comments on old programs coming off but on the other hand the newer replacement programs we are getting new orders and partially they are in backlog already.

So that gives us a level of confidence for the remaining portions of the current fiscal year and actually into the first and second quarter of next year.

Okay, great. And in the Flight Support Group -- the organic growth came in pretty strong at 18%. Do you expect this kind of strength to continue and how do you expect it to trend?

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

We were very proud about the results. Tom, do you want to cover --?

I can comment overall on the -- if you look at our guidance for the full year, of around say $470 million revenue, that would probably overall reflect on a full consolidated basis about half organic growth, half acquisition with the organic growth being in the Flight Support Group obviously higher as we reflected, and the Electronics Group more in the mid single digits that Victor reflected.

If you do that math and at this point, we're not forecasting for the balance of the year organic growth in that 18% range but, still very, very strong organic growth for the full year.

Okay. And with regards to margins, in FSG, do you expect these types of margins to be representative of a steady-state given the acquisitions that you've made in the past couple of quarters and the mix of product sales? Or do you think that they can improve towards the 17% level that you've seen before?

This is Tom Irwin again. And I would say at this point, we still feel comfortable. We had previously indicated that we thought the 17% range margins would be reasonable expectations in the Flight Support Group and actually on a consolidated basis as well, coincidentally. At this point, we still feel comfortable. So that would reflect some improvement in the balance of this year within Flight Support Group from obviously the 16.4% to an increase of that for the balance of the year. Again, reflective of the mix that we anticipate and the volume and the efficiencies, etc.

Tyler Hojo, Sidoti & Company.

I was wondering maybe if you could elaborate first on -- to Arnie's question about the technical issues you were having in ETG. What specifically are those technical issues?

Victor, do you want to respond to that, please?

Yes. The technical issues are generally -- they are product development technical issues, where we have subcomponents on complicated products, generally they are electro optical that we just have trouble getting them to perform to specifications. It's not that they don't work but we have very, very high specifications -- very cutting-edge kind of things that we're doing. And if we can't get them exactly up at specification, often we have to kind of start back on a research trail and then go back to vendors and have them rebuild things, like chips and things like that. Then it's got to go back to the foundry and the machining process and through yield and acceptance and test and it just, it takes a long time.

It's very frustrating but, we've never failed, I should note, to get the products to meet the spec. But it just, it takes longer and goes through hoops. Sometimes it happens faster and we get it all right in a short period time, and sometimes it doesn't. And that's why I always caution people don't focus on the quarters because things can slip 30, 60, 90 days. Generally, on the technical side when it slips that's the kind of thing that we're looking at. It slips anywhere from a few days or weeks to a few months.

So have these all been addressed at this point? The ones that you were specifically alluding to in the prior answer to again Arnie's question?

They either have been addressed; some have been and some are continuing to be addressed.

This is Larry Mendelson. The nature of that particular operation, business, as Victor has indicated, is extremely high-tech, extremely difficult specifications. And what we were experiencing isn't all that very unusual. We never get it -- because it's so complicated, hardly ever do they get it right the first time. And it does take time and they have to work it out. In the past they have always worked it out, and it has gotten resolved and it gets shipped, and the situation gets straightened out. So we're not overly concerned with this as a technical issue. It's not insolvable or something like that. It's -- that's the way that business is.

Okay, that's good. And I guess you sort of answered this from the Flight Support question that you just answered on the operating margin. But you guys are still holding to this 24% to 26% operating margin range that you mentioned on last quarter's conference call.

Do you mean on ETG?

Yes, that's right.

It's Tom Irwin. Again, we don't issue specific operating margin guidance by segment. But in overall discussions and indications of overall operating margins within ETG, we've consistently said that we could see them going to the mid to upper 20's, yes, but we don't issue a specific number.

Okay. Well, last quarter in the conference call you guys said 24% to 26% was the expectation. So that is what I'm basing it on.

I did say that, and I think that's -- I think I said it -- that's a more realistic range on a longer-term basis, yes. Because the question -- when we were running at 30% somebody asked me is 30% your normal rate and I said I would like it to be but it's very optimistic. So, I think I did say 24% to 26% is more realistic as something we would target.

Chris Quilty, Raymond James & Associates.

A question for you on the Flight Support Group. Can you give us some sense of the growth of parts versus overhaul? Was there any kind of a disparity or change in the contribution from those two classes of products?

I don't think so.

Okay. And for you, the overhaul aspect of your business remains strong, gaining strength or any changes?

I think it remains strong. It's gaining strength. I think it's doing very well. We have great management in there. And those guys are really doing a good job. So, I think all phases of our Flight Support Group are doing really well. I don't want to inflate Eric's ego too much. So I have to be careful, Chris.

That's okay I can switch (multiple speakers) in a minute.

That group is doing well.

It's been a long time since you've done any acquisitions in that area. Is that something that you feel you should just grow that business organically?

I'm sorry, which -- Flight Support?

For the overhaul portion of the FSG business.

Actually, Chris, the Prime acquisition that we made --

Oh, that's right.

Yes, that was in that group. So the answer is that we don't want -- in repair and overhaul, as in all businesses we're very selective and opportunistic. We do want to acquire just any old repair and overhaul facility. It has to have something unique, probably be in a niche area that is compatible with what we do. It has to have relatively high margins for that type of work. We don't want it to have normally a high labor component, where we're depending upon selling labor in order to make your profit because then it's harder to control the margins.

So, we are very, very selective. We see a lot of transactions and we're just very selective to try to do the ones that really work. And I can say that the past few that we've done have really been winners in not only the business but the people that have come along with the business. Those people who drive those businesses are really super people.

Great. Can you give us just a macro update? I know you don't like getting into specifics on some of your airline or OEM relationships in terms of airlines you might be targeting for broadened agreements -- supply agreements of PMA parts?

I'm going to toss that over to Eric because he is closer to the ground on that.

As you know, we are always working with the world's airlines and trying to increase our market share with them and bring new ones on board. We've got a number of talks that are ongoing right now. We in general don't publicly announce our contracts or sedges; we try to just lay low and pick up the business and then you see it in the numbers. So there's no particular relationship that I can speak about at this moment but I can promise you that our sales force around the world is working very aggressively in those areas.

Let me rephrase the question this way. We sometimes hypothesize that when the air transport industry is hurting that they might be more inclined to look for cost savings. Now that the industry is on the upswing, has that in any way diminished their vigor in pursuing these cost savings?

Actually, it has not. They are very focused on reducing costs. Of course the low-cost carrier phenomenon is occurring around the world. I think that the airlines believe that is steady-state. So, they are continuing to push down costs. You're absolutely right, that went after 9/11, that there was an increased emphasis on cutting costs. I think perhaps around 2000, airlines started pricing the tickets and driving a yield that way. And since 2001 they realized that this is steady-state. So I don't see it diminishing at all. As a matter of fact, I see it picking up and us gaining a lot of credibility with Pratt & Whitney's entry into the market.

Chris, this is Larry. Just to comment on that. Without mentioning names, yesterday I had a meeting with a company that -- I'm not going to name the company but (multiple speakers)

You can name, Larry. We won't tell.

I know. Neither will I! So, but this is a company that uses a lot of parts and has heretofore not been a customer of ours. They asked for the meeting. We had a very important meeting with three of their top people, including their CEO, and discussing this whole subject. And their comment was that with the Pratt entry and they just see the overall alternative parts option becoming more and more important in their overall business and they wanted to educate themselves and we talked to -- it was a very excellent meeting. We didn't sell any parts at that meeting. But clearly, this tacks onto what Eric is saying. He's seeing greater interest. And clearly, here is an example of one that happened yesterday. So I thought I would mention it to you.

That's great. That kind of answers to my question. So, thank you and continue the good work.

J.B. Groh, D.A. Davidson.

I guess implied in your full-year guidance number is a pretty hard snapback in the margins on ETG. Is that -- are the revenue there expected to be up over last year? In sort of that organic growth range that you've given in the mid single digit?

Yes, this is Victor. That's correct.

Because the comps obviously get a little tougher in the second, third and fourth quarters.

Correct.

Okay.

And, you know, J. B., one of the things I think you may recall, I'm sure, is that I cautioned when we had those very high margins at the end of last year that I didn't see that continuing at that rate, that I thought we probably would be doing higher than we had when I would say low 20s but definitely not up in the range where we were before. I still feel that way.

So and the balance of the year, higher revenues but, lower margin. Of course no one is going to complain about a mid-20's percent margin. But lower than the stuff that we saw last year, which is, as you say, kind of extraordinary.

Tom, how do you feel about that?

Yes, exactly the case, yes.

Okay. And then if I kind of make some assumptions on Flight Support and back out the organic, it looks like the margins of the acquired business obviously is lower because it's distribution based. What sort of opportunities do you see there to improve those? And kind of do you have goals in mind there as you look towards the anniversary of those acquisitions?

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

We've had a lot of success, J.B., in the distribution area and having this dovetail with our PMA business and repair business. We expect to continued growth in that area. I would say we expect pretty much balanced growth across the entire HEICO Aerospace Group in all of the different divisions. And it should just continue moving along. And Tom can comment on the margin expectation and what we're throwing out there.

This is Tom Irwin. Again, as we mentioned just briefly earlier, we do look for modest improvement in the operating margins of the Flight Support Group for the balance of the year to bring it closer to that 17% range for the full fiscal year. And that's reflective of margin improvement, as Eric just commented on, pretty much across the board in terms of the various sales mixes of both products -- new products as well as services.

So it's not just the acquired businesses that you are getting the margin expansion out of? It's across the board?

That's correct. No, we are -- as we look for the balance of the year, we see some improvement pretty much across the board.

Then lastly, on the corporate expenses last year kind of ramped throughout the year and second half was quite a bit higher than the first half. Is there -- there's probably some year-end incentive comp in that fourth quarter. But what other dynamics are going on to sort of help us get a handle on how that is going to look for the remainder of fiscal '07?

Relative to the full fiscal '07 I think we've indicated earlier that we are targeting for the full-year corporate expenses back into about the 3% range. So we actually were a little bit lower than that in the first quarter. I think $2.7. So as you are pointing out it will ramp up a little bit. But again, I think at this point we're still comfortable targeting overall corporate expenses in the 3% range, which would represent a decrease of 3.5% to 3.6% last year.

What is happening, as we commented earlier, a lot of those corporate expenses last year including audit and Sarbanes-Oxley costs, we're now into the efficiency phase of paring down those costs and getting better at doing it combined with less cost structure etc., etc.

There's been some developments at the SEC level and the accounting professional level that are also leading towards opportunities for cost savings. So I think the second half of the year we don't see the dramatic ramp-up in compliance costs that we did in the -- second half of '07. We don't see that dramatic ramp-up that we saw in the second half of last year.

Okay, great. Thanks. All of my other questions have been answered.

Jim Foung, Gabelli & Company.

Larry, could you just talk about capital expenditures? You're budgeting $18 million this year. That's a big jump from last year? And also, 50% more in your depreciation. Could you just kind of talk about where this money is going to be spending and what kind of -- yes, if you can maybe just start with that first.

Well, the detail of it I'm going to ask Tom to give you. But, essentially some of what you're seeing is last year when we were discussing CapEx and we actually didn't spend the CapEx budget that we spent -- that we had projected for last year. So we were low last year. So some of last year has actually flopped over into this year. That's part of it. Number two, we had to do some capital improvements on structures, building and Hollywood and some other things that we have in there that are non-recurring kind of CapEx expenses. So they would be unusual.

I think on a more -- on an ongoing basis, assuming the Company were the same size, which I hope it won't be because I hope we will make acquisitions and grow it. But on a consistent basis, the CapEx would probably drop down to I don't know -- $12 million -- Tom, is $12 million a good number?

Probably, yes.

Probably a more normalized would be a $12 million number. So the $18 million I think looks -- it looks higher because of those things that I just mentioned. There's nothing really major and unusual in that and it should not -- that's not in my mind an ongoing thing. The other thing is the $18 million.

At the beginning of the year when we ask the business managers to submit their CapEx requests, they submit basically a wish list. And because they know that if they don't submit the wish list at the beginning, it's going to be very hard to allocate those funds later on. So as they did last year, in '06 they submit the wish list and we don't spend what their wish list is. So I don't want to say that because we have said that we think it's going to be about $18 million. Deep down in my heart I suspect it is a likelihood it could be below $18 million, just for those reasons. But if you want -- do you want any more detail and color on that, Jim?

Actually I was hoping I was on your list for productivity improvements or lean manufacturing, that kind of operational excellence so that maybe we see some margin improvements down the road from that kind of increased spending. But it sounds like it's more for structures and (multiple speakers)

No, no, no. What I'm saying is that the $12 million is to do just what you are saying. The excess, what I'm looking -- when I say why -- normally it should be $12 million but it's $18 million this year. And I was explaining why it's $18 million instead of (multiple speakers). But when you go up from zero to $12 million, it is for the purpose that you point out.

Right, right. And the 12 replaces your depreciation and amortization pretty much.

Yes, basically it's about 25% to say 40% over the depreciation number, yes.

Right, okay. And let me ask another question. Your new products -- new PMA products this year is 350 to 400, which is 25% more than what you did last year around $300 million. Did you see any benefits in the first quarter from the additional new PMA that you expect to do this year?

Well, the answer is specifically I cannot tell you which part we -- if we got an approval on November 1, if we got -- we sold so many widgets.

We normally say that we normalize that or flat line it over three to four years. So in the first year we sell 25% of what we estimate. So, it's very hard to say that one particular product. But over a period of time, these new parts clearly drive revenue. And they drive it significantly. And I don't know. Eric can comment but rarely do we ever have a part that is a bummer that is below what we estimated our revenue from that part would be. So, over a period of 12 months -- any 12-month period, we definitely see contribution from these parts. And very significant contribution and that's one of the main drivers of our business because we derive our growth from market share in terms of new product. So, these new parts are critical to our growth.

Right. So all things being equal, we could see just higher revenues from as these new parts begin contributions to the segment?

Absolutely.

Okay. And then just shifting over to Electronic Technologies, could you just talk about what the new products are that you will be working on this year?

Victor, do you want to comment on that?

Yes. Generally the products are -- that are across the board -- there is nothing that I would consider to be one single blockbuster product. And as is the case historically with ETG, many of these new products are evolutionary in nature. They are an improvement on a prior version or some new iteration of existing products. But it's pretty much across the board at the same pace as we've always seen. Nothing particularly jumps out as something that by itself is going to have a major movement in the dial.

Okay. And your number of new products, is it kind of consistent with the past or are you --?

Yes. Absolutely.

Okay. And then Eric, I guess just one last thing regarding this segment. Were there any onetime costs associated with some of the difficulties you had in first quarter regarding product development and getting the specifications correct?

You are asking with the Flight Support Group, were there any onetime costs?

No, I'm trying in Electronic Technology.

Oh, I'm sorry. Any particular onetime costs -- none that I am aware of.

This is Tom Irwin. If you look at the component of our new product development expense, it was around 4 million consolidated, including both Flight Support and ETG. There weren't any really onetime or unusual single non-recurring events. It's pretty much a budgeted spending consistent with our expectations for the full year.

Arnie Ursaner, CJS Securities.

You covered a lot of ground. One specific area I wanted to try to go back on if I could is Arger, which when you bought it, had a mix of both facilities, its own PMA's that perhaps it hadn't distributed as well as you might be able to distribute. Can you maybe take a step back and give us a sense of how you have integrated Arger, and what sort of incremental positive benefits you might have been able to get over the last few months?

Arnie, I'm going to ask Eric. But in summary, I think as I might have mentioned to you before, we closed -- we acquired the facility -- the Arger business. We closed two of their they had two facilities. We closed both of them. We allocated their products to our parts group, their new parts -- PMA parts, so to speak, to our parts group. Their distribution business went over to Seal Dynamics. We eliminated a lot of overhead in that thing. And our guys did an incredible -- they worked very, very hard to do it in record time and they beat our own estimates in doing it. But if you want any more color -- Eric, do you want to add to that?

I think, no, you covered it very well. We did move over a number of people from Arger into HEICO Aerospace and they've been transitioned. Everything is now running steady-state without the prior two facilities. And it's been great for HEICO as well as for our customers as we have been able to continue the supply of those products in a more cost-effective manner.

I guess what I'm trying to get a feel for is, have we seen an on an annual basis, the full benefits of the integration? Are you still seeing cross selling opportunities to your customer base and has the full margin impact on the cost-cutting side been reflected at this point on an annual type basis?

I would say yes. The full costs are reflected in our current costs. There are additional opportunities going forward, which we are aggressively working. Should be continued increased benefits as time goes on. But I don't see any additional costs going forward related to that deal.

Arnie, just as a comment, the Arger was a textbook example of an acquisition and the elimination of duplication and efficiency. And I won't say that everyone can be like that but I would love for them to be. Because our guys did an incredible, incredible job and they understood that business and they did a wonderful job.

Arnie, also the other thing to point out -- it was really, as you mentioned, a cost driven model. We were able to take out significant costs. We have not increased the selling prices. We've been very customer friendly with all of this and it's worked out. I think the customers are very happy. HEICO is happy and the Arger folks who have come over are very happy as well.

Going back to the SG&A line, I just want to be very clear in my head. You've had tremendous performance and I think you clearly were indicating at least some portion of it is sustainable. Can you give us a feel for -- I know you gave us a corporate expense for the year but can you give us a little better feel for what you think your SG&A as a percent of sales will run for the year?

This is Tom Irwin. Relative to the corporate expense, yes, we commented on about (multiple speakers). What you're saying at the SG&A line, I think at this point we don't contemplate any dramatic changes from the first quarter as a percent of sales anyway. There may be a little bit, a few basis point changes but nothing dramatic. I think it's, as a percent of sales, probably modeling consistently out the rest of the year.

Well again, that's at least 100 to 200 basis points below where you've been historically or at least where you were last year in this number. Well over 100 basis points below.

Right. And I think if you work backwards from our overall operating margin targets of around 17%, we do need to pick up some SG&A basis margin improvement to hit those numbers. And so far, we are on target to do that.

Can you expand a little bit more on the international opportunities you're looking at over the next 12 to 18 months?

Eric, do you want to talk about that in Flight Support and Victor, then on Electronic Technology?

Yes, we had a significant amount of international business. We are always working that very aggressively. We're doing very well in increasing the penetration to our existing customers. I'm optimistic on bringing new customers on board. I think all is really going very well in that market. I don't know in particular what you would like me to address, but --?

Eric, my question -- that I know -- this is a rhetorical question for me, but are you seeing greater acceptance on alternative parts from foreign operators?

Clearly. That's a good point. Yes, we are. We've been making great progress over the years bringing foreign carriers on board. They already represent a significant portion of our PMA sales and since Pratt & Whitney's entry into the market a year ago, it's really given added credibility to what we're doing. So, I expect the foreign percentage to continue to grow.

And I don't believe you have broken out international sales yet as a percent of total. Tom, is that incorrect on my part?

That is correct. We do not on an interim basis. We do on our annual basis on the 10-K. So, foreign sales continue to be a significant component of our sales. There has not been any material change in our mix of foreign versus U.S. in the short term.

So perhaps asking my question a slightly different way could you remind us what that percent was in fiscal '06 and perhaps give us your view of what you think it could be over the next two years?

Typically, our foreign sales have ranged on a consolidated basis between 25% and 30% with the higher percentage being in the Flight Support Group and the lower percentage in the ETG group, primarily because we often face export control limitations in ETG. I think going forward, we see the overall --

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