HEICO Corp (HEI) 2007 Q3 法說會逐字稿

Good morning and welcome to the HEICO Corporation fiscal 2007 third-quarter earnings conference call. I will now turn the call over to your host, Laurans A. Mendelson, Chairman, President and CEO of HEICO Corporation.

Thank you and good morning to everyone on the call. We welcome you to the HEICO third-quarter fiscal '07 earnings announcement teleconference. I'm Larry Mendelson, CEO of HEICO. I'm joined this morning here by Eric Mendelson, President of HEICO's Flight Support Group, Victor Mendelson, President of HEICO's Electronic Technologies Group as well as HEICO's General Counsel, and Tom Irwin, HEICO's Executive Vice President and CFO.

Before we begin, Victor Mendelson will read a statement.

Thank you. Certain statements in today's conference call will constitute forward-looking statements, which are subject to risks, uncertainties and contingency. 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 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; our competition from existing or 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 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 conference 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 very much. Now, before reviewing our third-quarter operating results in detail, I would like to take a few minutes to summarize the highlights.

Both Flight Support and Electronic Technologies reported higher sales and earnings in the third quarter of '07, combining for an overall 30% improvement in consolidated sales and a 38% increase in consolidated operating income over the third quarter of last year. Our consolidated third-quarter net sales and operating income represents all-time record quarterly results for HEICO. The higher sales contributed to a 32% increase in consolidated net income over the prior year's third quarter. Electronic Technologies reported record net sales and operating income in the third quarter of '07 with operating margins improving for the second consecutive quarter.

In the third quarter, HEICO paid its 58th consecutive semiannual cash dividend since 1979.

Fiscal 2007 targets for sales, operating income and diluted net income per share have been raised. We believe each of these events are further indications of the concentrated efforts for long-term, sustainable growth at HEICO Corporation.

Moving into the details, our consolidated net sales in the third quarter of '07 increased by $31 million, up 30% from the third quarter of '06, reflecting revenue growth of 41% within Flight Support and 5% within Electronic Technologies. Net sales of Flight Support increased to a record $100.5 million in the third quarter '07, up from $71.1 in the third quarter '06. The 41% increase in Flight Support's revenue represents strong organic growth of approximately 24%, as well as the acquisitions of Arger Enterprises in May '06 and Prime Air in September '06. The organic increase in Flight Support's revenues 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 overhaul services within the commercial airline industry.

Net sales of Electronic Technologies increased to a record $32.7 million in the third quarter '07, up from $31.1 in the third quarter '06, principally reflecting organic growth. Overall, consolidated net sales increased 30% to a record $368.1 million in the first nine months '07, up from $282.4 million in the prior year. Of the $86 million increase, approximately $51 million is attributable to organic growth.

Our consolidated operating income in third quarter '07 increased 38% to a record $23.9 million, up from $17.4 million in the third quarter '06. Consolidated operating income in the first nine months of '07 increased 26% to a record $62.2 million, up from $49.3 million in the first nine months of '06.

Operating income of Flight Support in the third quarter '07 increased 55% to $17.8 million, up from $11.5 million in the third quarter '06, and increased 48% in the first nine months of '07 to a record $50.1 million, up from $33.8 million in the first nine months of the prior year. These increases reflect both the increase in net sales and higher operating margins, resulting principally from improved (technical difficulty) efficiencies and favorable product mix.

Operating income of Electronic Technologies in the third quarter '07 increased 6% to a record $10.2 million, up from $9.7 million third quarter '06, and totaled the $23.4 million in the first nine months of '07, versus $25 million in the first nine months of '06.

Corporate expenses in the third quarter of '07 were $4.1 million, versus $3.8 million in the third quarter of '06 and $11.3 million in the first nine months of '07 versus $9.6 million in the first nine months of '06. But they declined as a percentage of net sales to 3.1% in the third quarter and first nine months of '07, down from 3.7% and 3.4% in the comparable periods of fiscal '06.

Operating margins of Flight Support improved to 17.7% for the third quarter of '07, up very nicely from 16.1% in the third quarter of '06, and increased 17.8% the first nine months of '07, up from 17% in the first nine months of '06. Operating margins of Electronic Technologies were very strong at 31.3% for the third quarter of '07 versus 31.1% in the third quarter of '06. They were 26.8% for the first nine months of '07, versus 29.9% in the first nine months of '06. As expected, operating margins of Electronic Technologies are down year-to-date from last year, principally as a result of a less favorable product mix. As mentioned earlier, the group's operating margins in the third quarter of '07 improved for the second consecutive quarter of '07. As we have pointed out in the past, Electronic Technologies' operating margins may vary considerably from quarter to quarter due to variations in shipping schedules.

Consolidated operating margins were 18% in the third quarter '07, versus 17% in the third quarter '06, and they were 16.9% for the first nine months of '07, versus 17.5% in the first nine months of '06, reflecting the somewhat lower but still strong operating margins within Electronic Technologies.

Our diluted earnings per share increased a strong 29% to $0.40 in the third quarter of '07, up from $0.31 in the third quarter of '06.

Depreciation and amortization expense increased to $3 million in the third quarter '07, up from $2.3 million in '06 third quarter, primarily due to increased amortization of acquired intangible assets relating to recent acquisition.

Moving on to research and development, total R&D was approximately $3.8 million in the third quarter '07, versus $4 million in the third quarter of '06. The addition of new FAA PMA approvals continues to be critical to our long-term growth. We now have over 6000 parts approved by the FAA, and new parts released by our R&D groups in the third quarter of '07 continued at a very strong level and generally as planned for the period. We are targeting a range of 350 to 400 new PMA certifications in fiscal '07.

We also have a number of new products under development in Electronic Technologies. As I've mentioned many times before, we believe that our focus on continuing new product development is fundamental to our growth strategy. This strategy, as you all know, has proven very effective over the years.

Selling, SG&A expenses as a percentage of net sales decreased to 17.8% for the third quarter '07, down from 19.8% third quarter '06. This principally reflects improved efficiencies in controlling costs while increasing revenues. The increase in SG&A expenses to $23.8 million in the third quarter of '07, up from $20.2 million for the third quarter '06, is principally due to higher operating costs, primarily personnel-related, associated with the growth in sales, including the impact of the Prime Air acquisition.

Interest expense was about $729,000 in the third quarter '07, versus $958,000 in the third quarter '06, due to a lower average balance outstanding under our revolving credit facility. Our interest expense and of course leverage has remained low, reflecting our decision to operate with low leverage. Interest and other income in the third quarter of '06 and '07 were not significant and I won't comment on them.

The Company's effective tax rate was 33.8% in the third quarter of '07 and 32.9% for the first nine months of '07, compared to 33% in the third quarter of '06 and 34.4% for the first nine months of '06. The decrease in year-to-date effective tax rate is principally due to an income tax credit for qualified research and development activities the Company recognized in fiscal '07 for the full fiscal '06 year pursuant to the retroactive extension in December '06 of the underlying provision of the Internal Revenue Code. The '06 credit, net of expenses, increased net income by approximately $0.5 million or $0.02 a diluted share in the first nine months of '07.

Minority interest shares in our consolidated income was 4.4 million in the third quarter of '07 and 2.8 million in the third quarter of '06. The increase from the third quarter of '06 is of course principally attributable to higher earnings within Flight Support. The minority interest relat4es principally to the ownership interests that are held by Lufthansa in Flight Support and by others in certain subsidiaries of Flight Support, including Seal Dynamics and Prime Air, as well as the minority interest held in Sierra microwave and HVT Electronic Technologies.

Moving onto the balance sheet and cash flow, as you can see, our financial position remains extremely strong. Cash flow from operating activities in the first nine months of '07 totaled $37.3 million, including $15.3 million generated in the third quarter '07, up from $27.2 million for the first nine months in '06.

Our working capital ratio strengthened further to 3.1 as of July 31 versus 27.7 as of October '06. DSOs of accounts receivable equaled 52 days as of July 31 of '07, versus 54 days as of October 31 '06. As I have said before, we very closely monitor receivable collection efforts in order to manage our credit exposure very carefully.

The inventory turnover rate as of July 31 equaled 127 days as compared with 142 days as of October 31 '06. Inventory levels of Flight Support have increased since October '06 and are attributable to the higher number of new parts being developed, but overall turnover rates have improved significantly.

No one customer accounted for more than 10% of net sales. Our top five represented approximately 20% of consolidated net sales for the third quarter '07 and about 21% in the third quarter of '06.

Long-term debt to capitalization decreased to 10.4% as of the third quarter '07, versus 14.8% in October '06. This reflects net year-to-date payments of $14 million under our revolving credit facility. You all know that our leverage continues to be extremely low.

CapEx in the first nine months were $9.5 million, and net CapEx spending for the full year is estimated between at $16 million and $18 million.

Now, to comment on the outlook, we continue to believe our commitment to develop new products and services, increasing products demand from customers, our strong financial position, as well as our ability to identify select acquisition opportunities provide the foundation for continued growth in sales and earnings. Based on current market conditions, we are raising our targeted fiscal '07 net sales to a range of $490 million to $493 million, diluted net income per share to a range of $1.40 to $1.43. Operating income in '07 is expected to approximate $83 million, representing a consolidated operating margin of about 17%. These targets exclude the impact of additional acquisitions, if any. We continue to target '07 cash flow from operating activities in the range of $50 million to $54 million.

In closing, we continue to adhere to our long-term strategy of developing and marketing new products and services, which provide our existing customers with improved technology as well as substantial cost savings, and allows us to expand our markets. We believe that this strategy has resulted in the strong financial performance we have reported since 1990, and it also positions us with the opportunity for ongoing substantial forward growth.

As a comment, Tom Irwin told me that that our growth in revenue and net income over the 17-year period that we have run the Company is a compound annual growth of 19%. And happily for the shareholders, the stock price has compounded annual growth of 23%. We remain confident that our disciplined business model will continue to provide opportunity for long-term, sustainable growth.

That is the extent of my prepared comments. I would like to open the floor now for questions. I'm going to ask the operator to open the floor, please.

(OPERATOR INSTRUCTIONS). Tyler Hojo, Sidoti & Company.

Good morning, guys. I just wanted to quickly touch on the guidance here. You know, obviously very strong results once again, but the guidance implies a sequential slowdown in the fourth quarter in terms of both revenue and EPS. Looking back historically, this would be the first fourth quarter in a number of years that that would be the case. So I was just wondering. Is this just conservatism or maybe we saw some strength kind of be pulled out of the fourth quarter into the third quarter? Just your comments there would be helpful.

Well, I think, honestly, it's probably a little of both. I think it's our inherent tendency not to lead with our chin and make promises that we can't fulfill. We think the third quarter was exceptionally strong. Our people are not 100% sure. It's still early in the fourth quarter, so we don't know what's going to come up but we are going on our original estimate of what the fourth quarter would produce. Until we get deep into it, we don't want to make any changes to that, so I think we are conservative in doing it. I also think we're realistic because we don't want to promise the moon and deliver less.

I suppose another company, if we were trying to manage earnings, could push stuff out the door in the fourth quarter to create a bigger result in the fourth quarter to make analysts happy. We don't do that.

The other thing is we make our estimates based upon growth, annual growth as you know, Tyler. We say we can grow, we think, 20%. We try to sometimes shoot higher. If we deliver the $1.41, $1.43, whatever we are saying, we're going to be right in that target.

So, we will really have to wait a couple of months to see what the result is. I can tell you that business is very strong. If there is a continuation in the fourth quarter of the rate in the third quarter, you know, maybe we are low. I don't know. But we're not there yet and I don't want to promise something that is unrealistic. I'm hopeful; I'm optimistic. Obviously, if the sales come in, we're going to ship them because we're not going to hold sales.

On the other hand, we're not going to aggressively push subsidiaries to push merchandise out the door to try to make numbers.

So, I'm trying to be very candid with you and tell you the way it is, but I think that the results of the Company are -- we look at it annually. We can't look at it quarterly because, as you know, Electronic Technologies can give us some surprises, and Flight Support, until the orders or in, you know, we can't be absolutely sure. So that's really the projection in Flight Support is based upon our internal projections for the year. We haven't upped them yet and we will see what -- at this moment, I don't even know what August is going to show because we're not finished with it, but you know, in another month or two, we will be able to know better.

Okay, well, I appreciate the color and I think that's fine. I guess talking about the Electronic Technologies group for one second here, the last couple of quarters, you've been able to tell us directionally what's going on in the backlog. Since that is a pretty big swing factor in terms of the results that you post, could you kind of update us directionally just in terms of what's going on with the backlog?

I'm not sure. This is Victor. I'm not sure what you mean by update you directionally on the backlog.

I think last quarter, you said the backlog was up about 20% year-over-year. I believe you, in the first-quarter conference call, you told us that the backlog was up as well. I think you guys were speaking more in terms of the revenue hasn't showed up yet, but it's coming based on the backlog. So I was just wondering. I know you won't give me a firm revenue number but just, directionally speaking, is the backlog up, down, flat? That's kind of what of I'm getting at.

Tyler, this is Tom Irwin. I would say, overall, the backlog is about where it was. I think, as further color, you may recall, really within the Electronics group, the first-quarter results were really short of our expectations. We've commented extensively (multiple speakers) pointed out that the orders were in-house, they weren't in backlog and for a variety of reasons, they weren't shipped.

We improved those results, both revenue-wide and margin-wide, in the second quarter. Really in the third quarter, we really caught up even faster than we thought we would. As we mentioned, the third-quarter revenue results were record for ETG, so a lot of what has been delayed even somewhat a little bit faster than we expected got caught up. Then secondarily the operating margins in ETG with that favorable mix and the higher volume actually, went over 30% again, and again, consistently, we've commented that, on a sustainable basis, we don't think 30% margins, year-over-year -- year-by-year, can be sustained. So I think, given that, the third quarter was extremely strong from a margin perspective as you relate to ETG as well.

Right, but just in terms of the backlog for ETG, you are saying that it was about flat with where it was in the second quarter?

Yes.

Did I get the right?

Yes, about flat, yes.

Okay, well, I appreciate that. I will hop back in the queue.

J.B. Groh, DA Davidson.

Congratulations on the numbers. I had a question on the organic growth in Flight Support. That was pretty strong relative to I think what we saw other aerospace companies put up in terms of aftermarket performance. I know you typically do a little bit better. But could you characterize that in terms of what were the drivers? Was it new customers increased alternative parts use, penetration, new parts development? How do we sort of think of that in terms of what drove that big number?

I was going to announce or mention, to answer you by saying compared to other companies and I was going to say to you, well, HEICO is just a better company! (LAUGHTER). But I'm going to let Eric take that question.

(multiple speakers) I think is due to everything that you mentioned -- new customers, additional products, increased volume on the same products. We are really just doing very well in all of the areas. I think that's what drove it. There was no one particular area.

So nothing really stood out over the others?

No, nothing that I'm aware of off the top of my head. I think it was really everything.

Then you guys had mentioned 6000 total parts in the catalog. What's the active number?

The active is about 4000.

4000, okay. So when you look at the 350 to 400 new parts, it looks like a little bit better growth rate that on the 6000. Okay.

Then in the past, I think you guys mentioned that this ETG margin that you got last year in the second and third quarter was not sustainable, and then low and behold here in the third quarter, you had a great margin performance. Was there a big project that came through there or anything that we can point to? I think incremental was about 35%. So is there anything we can point to there?

J.B., this is Victor. The answer is that I think what we've said is that, over the full year, we don't think that margin, the higher margin number, is realistic. So we've had a low quarter in the first quarter and it kind of I think balancing out. I wouldn't look for 31% or whatever the exact number is over the year. I would say the reason in this quarter in particular it was so strong, it was a mix issue. Some of the things that were delayed earlier in the year moved out later in the year, and we had strong performance by some of the higher-margin businesses as well.

Tom, I don't know if you have any color to add.

(technical difficulty) As you pointed out, for the full nine months now, with the mix of the first quarter, second quarter and obviously the outstanding third quarter, we are running just a hair under 27% operating margins in ETG year-to-date nine months. I think that is consistent with what we've indicated in the past, that we are more comfortable, rather than last year's 30%, that they would range in the 25% to 27%. So again, year-to-date is on the high end of that range of our targeted O/I margins sustainable, year-over-year.

Okay, great. Then the last one for Larry, maybe -- what are you guys seeing on the acquisition front? You know, there's been obviously some turmoil in the credit markets. Have you seen any impact on competition for deals, maybe from private equity, that sort of thing?

We haven't seen that yet. You know, we continue to have a pipeline of acquisitions that are in-process, and hopefully some of them are going to close, maybe some in the near future. We can't announce them until it's done because with acquisitions, you never know. But we really haven't seen more deals and more transactions, I think because it's this whole subprime issue in the debt markets are relatively new, so the impact hasn't been felt. I think it's probably being felt in the bigger deals, but certainly in the companies that we do try to do singles and doubles as you know, we really have not seen anything yet. You know, we are kind of waiting after Labor Day to see if that's going to roll out and there be some changes.

Okay, great. Thanks for your time.

Richard Tortoriello, Standard & Poor's.

Good morning. Just a couple of quick questions -- first of all, I'm sorry but I missed the organic growth numbers. I wondered if you could give me those.

Organic year-to-date on the Flight Support group was 21%,and on the Electronic Technologies group, between 4% and 5% for the quarter and year-to-date.

Okay, thank you.

On Flight Support in the last quarter, I think it was 24 (multiple speakers) 24%.

Okay, great. Thank you. Then on the British Airways agreement that you announced in May, I wonder if you could tell us when you might start to recognize revenue from that, and also when you think you would start to really recognize significant revenue from that alliance.

I'm going to ask Eric to respond.

You know, for competitive reasons, we don't disclose, you know, we don't like to comment on the specific customers (technical difficulty) that the program has started and we do expect it to be a very important, very important program and also should continue to get certain other airlines who have not endorsed the use of alternative parts -- this should get them even more comfortable with it. And I think it puts us any good position. Since we offer a majority of the alternative parts that are out there, now airlines cannot only buy our parts but also we have a program whereby we will source all other alternative parts for them at a very reasonable price, run the entire program, work with them to get it approved and in their system, and create significant savings for them.

That's great. That actually anticipated my next question, which is basically that it looks to me that airlines really want to cut costs and need to cut costs, particularly with the fuel prices so high. So I think my understanding is that you currently serve 17 with British Airways of the 20 largest airlines. Six of those are strategic alliances if I have that right. So I'm wondering. Do you see the potential to converting some of the other 11 that you're not serving to strategic alliances? Then just maybe if you can give a little information on what you see as the market opportunity out there. I know you just did a little bit. Also, I forgot the last part of the question; I'm sorry. Go ahead.

Well, actually, we've got -- of the -- you know, you're right that 17 of the world's 20 largest airlines buy our HEICO proprietary parts. I have to add though that all 20 of the world's largest airlines purchased -- are our customers, so they would buy either repair services or you know, we would distribute products to them. Of the 17 that buy our parts, I think there are 7 that are strategic partners. Yes, I think that there's an opportunity for the other 10 to grow their relationship with us and broaden what they purchase from us, absolutely.

Great. The other part of my question is basically what is your general strategy for trying to convert some of the non-PMS airlines to buying PMA parts? How do you approach that? Do you expect to be making announcements in the near future, things like that?

Well, I think it's primarily an education process. You know, when HEICO started in the business, nobody bought PMA parts. Now, we've got 17 of the world's 20 largest buying the parts, so I think it's a matter of education, because there's no reason why every airline in the world shouldn't be buying parts. Fortunately, we have a majority of the aircraft out there are using our parts, but I think that there's continued opportunity and there's no reason why, if we (technical difficulty) as long as we just continue to do our jobs, that we won't get the others onboard as well.

Okay, that's great. Thank you.

Arnie Ursaner, CJS Securities.

Good morning. I want to (technical difficulty) go back to Tyler's question. Unfortunately, I'm going to have to use a word I used last year in Q4. Your guidance is illogical, so let me kind of kick around what I think you're saying and let you respond.

If I took the high end of your guidance, it would imply growth in the fourth quarter of Flight Support group that would be the lowest we've seen since the first quarter of 2004. Or, alternatively, it would imply a decline of some magnitude in the Electronic Technologies group. I would love to have you explain how that makes sense, given the trends you're seeing in your business.

Tom, do you want to (LAUGHTER)?

Well, Arnie, this is Tom Irwin. (multiple speakers) not sure where the math comes, but our guidance doesn't break out revenue by business segment. Year-to-date, it's been running roughly 75%, 76% Flight Support and 24%, 25% ETG. Obviously, if we wind up in, say, the midpoint of the guidance, then the fourth quarter EPS is going to be down from the third quarter; that's just a matter of math.

As to the specifics, I think the things that we have spoken about is that the ETG margins were extremely high in the third quarter. As Larry mentioned, at this point on the Flight Support group, while we are very, very comfortable with the long-term market, quarter-by-quarter changes (inaudible) recalling that in the Flight Support group, we don't have visibility in terms of backlog like we do in the ETG group. So we're giving our best shot as our overall guidance for the full year. If some orders slip into the fourth quarter, then out of the fourth quarter into next year, then obviously it will just benefit our fiscal '08 results.

Well, as I said, we can talk off-line but the math does not equate or make any sense whatsoever. I think it's, frankly, going to cost more concern over investors than it should. There's something about being conservative, but again, I think you're being completely illogical. We can talk about it off-line.

The second question is a little more specific. The FAA changed its timing of repair work on the 737 on wing flaps. Do you provide products to -- do you have PMA parts for wing flaps for the 737?

Arnie, this is Eric. No, we don't have any (background noise) in that area.

Okay. Going back to the Boeing question, maybe I'll ask -- again, you're almost implying that Q3 had some unusually positive events. So going to the Flight Support group, was there some ramp of activity in Boeing that may be one of the reasons you're conservative? Was there a (multiple speakers)?

No. Arnie, the answer is no. Again, we let the numbers fall where they fall. In the third quarter, it was a very strong quarter, honestly stronger than we had anticipated. Similarly, is the fourth quarter going to be stronger than anticipated? I don't know, but we haven't changed our model, and we haven't assumed anything that's going to be better than our normal I think conservative assumption. If it is better, the numbers are going to come out. I think that's really what you're seeing; you're seeing a very strong third quarter. We don't give guidance but analyst guidance I think was (technical difficulty) according to what I saw on Yahoo! was $0.37. We came in at $0.40, so obviously it was a strong quarter, stronger than we initially had thought it would be.

Is the fourth quarter going to be just as strong? We did not change our assumptions. Maybe it will and maybe it won't, but I can let you know in another couple of months. That's why you are saying it's illogical. We would rather be safe than sorry; that's all. I would rather come back to you and say we outperformed then hey, you know, I promised you something and I couldn't deliver. I think you have been following us for a number of years now, and you know that we deliver what or more than we say. I guess that's our policy.

Which is great. Again, the only issue is the implication would be an 8% sequential decline or so in revenue. Again, I know you don't do it by quarter, but it's in that magnitude in Flight Support group. Seasonally, Q4 is historically, going to Tyler's point, one of your strongest quarters. (multiple speakers)

I'm going to let -- let Tom give you a little more color.

Again, we don't break it out by segment, but just using our guidance number, I think, relative to last year's fourth quarter, our guidance is still like a 14% growth, all of which is organic because we've had no acquisitions. So again, maybe we are victims of our own success in the third quarter, but again, I'm not sure that 14% organic growth projection for the fourth quarter should give anybody concern, again consistent with our comments about our long-term growth opportunities.

Well, staying on the same issue on margins, to the extent your goal for the year of a 17% margin turns out to be right, then margin in both segments would have to be down mechanically in Q4 to get to a 17% number for the year. Is there something in your business causing margins to decline?

Well, again, I think, if you do -- based on rough math, if we hit 17% consolidate O/I margins in the fourth quarter, we will obviously make the full year of 17% margins. So we are just -- again, if we -- we average the 17% in the fourth quarter, we will hit our full-year guidance.

Right, but that would be much lower than what you just reported, and again (multiple speakers).

Arnie, Arnie, Arnie, if it makes you feel any better, I'm going to tell you what I tell some of my people, and this is an internal operating thing. I tell them "Guys, you've got to do better in the fourth quarter." They tell me, "This is what our program looks like." I say, "Eric, you are sandbagging the numbers", because I come out where you come out, Arnie." But saying that, I can't create -- these guys are working full-tilt. We have an incredible, in my opinion, an incredible group of people that puts out -- you can't imagine. They say to me -- Eric says to me "Dad, we are pushing as hard as we are --." I say "Eric, these numbers look low to me." He says "We are pushing; if we do better, we do better." And that's what I'm saying to you and the shareholder. We promised. You know, we say we're going to do 20% growth and we feel we can do that and consistent and so forth, on an annual basis, and that's what we give guidance on. If we do better, again, then we do better. But I don't want to promise it now.

I understand. Better to exceed, which is perfect. Final question for you or Tom -- on your CapEx budget for the year, $16 million to $18 million implies a pretty sizable addition in Q4, since year-to-date you are only $9.5 million. We're is that being allocated? What is that targeted for?

Yes, this is Tom Irwin. They are projects that were originally budgeted. Again, they were a couple of carryover projects from last year that we had referenced earlier in the year when we commented on our $18 million budget, which is probably up $4 million or $5 million from sort of a maintenance CapEx budget. It includes some facilities expansion, buildings, as well as the sort of the normal growth CapEx of machinery, equipment, systems and so on and so forth.

As you're pointing out, we've only spent about $10 million through the nine months. The CapEx orders and our budgets are in-process to get to the $16 million, $18 million. Whether we actually spend it this year or whether it some of it may be committed this year but spent next year, you know, it's a little hard to tell. But part of it is the fact that we are not sure exactly when the stuff will be received and so on and so forth.

Okay, thank you.

Arnie, thank you very much.

Chris Quilty, Raymond James & Associates.

Good morning, gentlemen. Most of my questions have been answered, but I guess this is perhaps for Eric. Can you just give us a general update on your thoughts on the state of the market, given the sort of mid to longer-term trends you're seeing in planes in service and routes being added, and some of the historical aircraft delays that we've seen this summer, and how that might impact the business either near-term or longer-term?

Chris, I would be happy to talk about that. You know, we are seeing tremendous growth in the marketplace and tremendous acceptance of our parts, as well as repair services, distribution, specialty products. I think we're gaining market share in a market that is already growing very rapidly. I don't see any reason why that wouldn't continue.

Our second and third quarters, frankly, were unexpectedly strong. There's no reason that I see out there; I don't see any information which leads me to believe that that strength would change. However, we do have original budgets that we stick to, and we make sure that we deliver as much as we can possibly deliver. But we see the market incredibly strong, acceptance growing, engine shop visits growing obviously with available seat miles growing. This continue -- this trend should continue, in our opinion, for quite a long time. I think that, ultimately, if the OEM market slows down, I think that our market share increase and the strength that the HEICO aftermarket business -- which is the majority of our Flight Support group -- I think the strength that we've seen should continue. We're just doing extremely well, and it's taken awhile to get to this point but now we are recognized I think around the world.

Also, I think what's becoming pretty obvious to everybody out in the industry, including the original equipment manufacturers, that HEICO is really not a threat to their business. This is a very good business model. OEMs can continue to do very well. They've got phenomenal business models. You can see by the numbers that the OEMs are posting, they are doing great, notwithstanding a little bit of competition from HEICO.

I think that we -- being out there is a good thing for the industry. They are starting to recognize that HEICO is not a threat. I think some of the bitterness which existed in the past is starting to decline. I mean, nobody likes the competitor; everybody likes to have total market share, but I think they realize that HEICO is not going to prevent their businesses from doing extremely well. Our strategy has been to take minority market share on each of the parts that we provide. We don't size our production to go after all of the particular market share in a particular SKU. We take a minority share and we can do very well and add value to our customers, and the OEMs can continue to have a great business model and, frankly, make a fortune. So I think all this is working together, it's working very well, and from my share, it should continue.

I'd like to add one thing. This is Larry. As you probably know, but if not, I'm going to mention it, according to Boeing's projection, they expect, in the next 20 years, the commercial fleet to go from about 17,000 to 36,000 commercial aircraft. Whether they are correct, it's 36,000 or it's 29,000 or 32,000, it's almost irrelevant because we're talking about almost 1000 aircraft a year.

From our point of view, repair, maintenance, aftermarket parts and so forth, we're talking about doubling the fleet over the next 20 years. So the long-range outlook, not only for HEICO but I think for the whole sector, to me is very, very strong. We are seeing the direct results at HEICO. Other companies are seeing results, perhaps not as strong as we are, again because I think, as I said earlier, I think we're better and our guys are better. But we're doing what we think we should be doing, but we see a long tail on this and we see the peaks and valleys that we used to see in the Aerospace industry are, we believe, smoothing out because you now have buyers of new aircraft in China, India, Middle East, as well as the U.S. and Europe, which used to be -- U.S. and Europe -- the only buyers, and the rest of the world was really secondary. So all these things I think are playing into our business model, and we are seeing the results.

Great. I will ask the question only because I haven't asked it in about a year, for Victor, which is -- any forward movement on the cockpit video voice recorder, backup power system?

Yes. The FAA never took action on it, unfortunately, but we have been selling it in fact on 787s. It is also going on one or two military aircraft that I know of.

Okay, great. Thank you, gentlemen.

Matt McGeary, Sentinel Asset Management.

Good morning. I guess a first question, probably for Eric -- I just wonder if you could comment on the competitive landscape. I think I've heard a few other aerospace-related industrial companies talking about the PMA parts business. It would be sort of a newer business for them, but I'm just wondering if you've seen anything on the horizon. Given your size, it's probably not a troubling issue. I'm just sort of curious. Basic economic theory will tell you that market (inaudible) might attract some competition.

This is Eric. I'm not aware of any other companies going into this [area] (technical difficulty) you could provide, you know, if you let me know which names you are commenting on, I'd be happy to (multiple speakers).

I just heard [Habitat] talking a little bit, and they are not talking about a full-scale (multiple speakers) new business here, but parts here and there. I just wonder if that's (multiple speakers).

We are familiar. I mean, I would just characterize that as extremely small. You know, this industry, alternative parts, exists for both new parts as well as repairs. There have been companies doing (inaudible) repairs; we do this in our component repair business. This has been going on for a very long time. I think that's the primary area that the company you mentioned is focusing in. But there continues to be a robust market in that field, in terms of repairs and competition with what the OEMs endorse in their manuals. I expect that to continue to grow. HEICO has got a great position there because, in our repair services, we offer both HEICO parts to -- or PMA parts to reduce customer costs, as well as what's known in the industry as [DER] repairs.

The third thing we offer, of course, is OEMs parts. If a customer wants us to use the OEM product, we do that as well and we are a very good customer of some of the OEMs.

So I would expect that to continue. I'm not aware of any material change in the competitive landscape. I think, as the market continues to grow and as, frankly, Pratt & Whitney's push into life-limited parts for engines has given the PMA industry and HEICO in particular a lot of credibility. I think that our market share will continue to grow.

Okay, thanks. Just lastly, on the -- sort of a housekeeping or just general question. On the common versus the Class A shares, I know this has been sort of an unusual issue for a lot of years, as initiatives close, I think there was a 20% difference. I'm not asking you to explain that, because I'm not sure anyone can, but I just wondered. Is there anything you could do sort of financially to address that, or is it not just that relevant or (inaudible) to you?

At this moment, we don't think there's anything we can do. We've said that if we ever sold the Company, both shares would be treated the same and that gap would close. So I guess if we ran out and sold the Company, that is one answer.

But in the shorter term, everyone we've spoken to, which includes some of the biggest firms on the street -- it includes names that you would know -- has advised us that there is no reason -- they cannot, as you point out, can explain why there is this big difference. It's probably an issue of liquidity, but again, you didn't ask me to explain it and I really can't explain it, except to say it's probably liquidity-related, although there are 15 million A and 10 million HEI, the A is held -- it's 20% less investment. The dividend is the same. If the Company is ever sold, they are both the same. So some very sophisticated institutions hold the A and they have held it, and they have enormous profits in it and they are very loyal shareholders, and they won't sell it. So you know, because there are these large blocks that are held by these very sophisticated groups, the liquidity on the A appears to be -- we know is less and it trades at a lower price. So I think maybe that's part of the answer why there is a difference, but there is very little that we can do in the short term to change it. We focus on running the Company and producing results for everybody, so it's not much we can do.

Christine Min, Calyon Securities.

Good morning, gentlemen. You mentioned air travel growth beyond North America and Europe. What kind of trends in MRO are you seeing and growth in your business, particularly from any geographic areas?

This is Eric. We are seeing a strength throughout our entire network. In North America, in Europe, in Asia in particular, we are seeing enormous, enormous strength. You know, our sales have really grown outside of the United States significantly, so actually, now the majority of our PMA sales come from outside the United States. We expect, as additional airlines take additional deliveries, that will bode very well for our growth in sales.

Christine, there's an interesting statistic that -- it compared 10 years ago, 1997 the current -- 10 years ago, the Americas together for about 76% of our PMA sales. They now account for about 49%. Europe, the Middle East 10 years ago was 20%; now it's 34%. Asia-Pacific has had a huge increase, 4% 10 years ago; it 17% now. This is good for us, because we want to see the geographic movement. It shows we're accessing our customers. More customers are buying into the alternative parts program, and of course, there is more international activity. So we like that.

Great, that's great color. On a more general outlook question, you've mentioned that you've delivered excellent performance over the years, and in the past, you have talked about going forward, long-term revenue growth. You're targeting about 15% and earnings growth of 20%. What can you see driving growth rates to be higher, possibly, over the next two years? Are there opportunities to drive your operating margin expansion to above the 17% level that we've been seeing?

I think as a -- well, it's two questions. As far as the operating margins, I don't want to promise that we're going to do better than the margins that we're doing now. If we do, I don't think it's going to be a major kind of increase. We are constantly pushing the envelope to try to 0.5 point to 1 point. In Electronic Technologies, I don't think we can do better than the 30%-type margins that we do there, so I would not expect more they are, maybe even a little drop-off because 30% is very hot.

In terms of Flight Support, you know, I think the margins that were 17%, 18%, maybe we could get a little bit better; that's a possibility.

As far as the overall growth in the business, 15% topline, 20% bottom line. Those are our targets and we do think that they are attainable. You know, we've done it for 17 years and actually, except for 9/11, the aftermath of 9/11, those growth numbers would have been considerably greater, compound annual growth.

So I think that we can continue and the strategies that we're going to use are exactly the same strategies that we've always used -- a focus on new part development. We might see a little bit of pricing as time moves on, because some of these parts have been out there awhile and maybe we will get a few, a little bit of growth in that -- and the acquisition program, which is very active and we're looking at transactions. So it's going to be -- the strategy will be more of exactly the same that has powered us to this point.

That's great. Thank you.

There are no further questions.

I want to thank everybody for their interest in HEICO. We look forward to speaking to you at the fourth-quarter teleconference, which I guess will be sometime in December after we release fourth-quarter and year-end results. So I wish you all a very good Labor Day weekend. Drive safely. We will be talking to you real soon. Thank you.