HEICO Corp (HEI) 2007 Q4 法說會逐字稿

Good morning and welcome and to this HEICO Corporation fiscal 2007 fourth-quarter and full-year earnings conference call.

During this call, there will be breaks for questions. (OPERATOR INSTRUCTIONS)

At this time, I will turn the call over to Larry Mendelson, Chairman, President, and CEO of HEICO Corporation. Mr. Mendelson, you may proceed.

Thank you very much and good morning, everybody on the call. We welcome you to the HEICO fourth-quarter and full fiscal year 2007 earnings announcement teleconference.

I'm Larry Mendelson. I'm CEO of HEICO Corporation. I'm joined here this morning 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 contingencies. HEICO's actual results may differ materially from those expressed in or implied by these forward-looking statements as a result of factors, including but not limited to lower demand for commercial air travel or airline fleet changes which could cause lower demand for our goods and services; product specification costs and requirements which could cause an increase to our costs to complete contracts; governmental and regulatory demands; export policies and restrictions; reductions in defense or space spending by U.S. and/or foreign customers; or competition from existing 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 stability 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 cost and revenues; and HEICO's ability to maintain effective controls which could adversely affect our business and the market price of our classes of common stock.

Parties listening to today's conference call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including 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.

Thank you, Victor. Now, before reviewing our fourth-quarter and full-year operating results in detail, I would like to take a few moments to summarize the highlights of what we consider an outstanding fourth-quarter and full-year results.

Both Flight Support and Electronic Technologies reported higher sales and earnings in the fourth quarter of '07, combining for an overall 27% improvement in consolidated net sales and a 36% increase in consolidated operating income over the fourth quarter of last year.

Our consolidated fourth-quarter net sales represent all-time record quarterly results for HEICO. The higher sales contributed a 15% increase in consolidated net income over the prior year's fourth quarter. Full-year net sales, operating income and net income and cash flow from operations represent all-time high records for HEICO.

In September, we completed our 35th acquisition since 1990 with the addition of EMD Technologies, which design, manufacture high-voltage energy generators for medical, baggage inspection and industrial imaging manufacturers and high-frequency power delivery systems for the commercial sign industry. For the second consecutive year, HEICO was named to one of the 200 Best Small Companies by Forbes magazine.

Earlier this week, because of confidence in the future and the results of our operations, we announced a 25% increase in our semi-annual cash dividend. We believe that our operating results and our acquisition successes are a further indication of the concentrated efforts for long-term, sustainable growth at HEICO.

As I have said many times before, we do consider HEICO a growth company, and we believe that this year's performance is definitely proving it again. Since 1990, or over the past 17 years, HEICO has achieved a compound annual growth rate of 19% in both net sales and net income. We are pleased that investors have recognized this growth and have helped our stock to appreciate during that period at a compound annual rate of 24% and that's since 1990, when this management to control of HEICO.

Moving on to the specific areas in net sales, consolidated net sales in the fourth quarter of '07 increased by $30 million or were up 27% over the fourth quarter of '06, reflecting revenue growth of 31% within Flight Support and 18% within Electronic Technologies.

Net sales of flight support increased to a record $103 million in the fourth quarter '07, up from $78.7 million in the fourth quarter of '06. The increase in Flight Support's revenue reflects organic growth of approximately 22% and the acquisition of Prime Air in September '06.

For the full fiscal year '07, Flight Support's organic growth approximated 21% compared to net sales for '06. The organic increase in Flight Support revenue reflects our success in developing and bringing to market new products and services, as well as the continued strong demand for aftermarket replacement parts, as well as repair and overhaul services within the commercial airline industry.

Net sales at Electronic Technologies increased to a record $36.9 million in the fourth quarter of '07, up from $31.2 million in the fourth quarter of '06. The increase primarily reflects organic growth of 12%, as well as the acquisitions of FerriShield in April '07 and EMD Technologies in September '07.

Consolidated net sales increased 30% to a record 500 -- I'm going to round it -- $508 million in the full fiscal '07, up from about $392 million in the prior year. Of the $116 million increase, approximately $73 million is attributable to organic growth, representing an overall target growth rate of about 17%.

Our net sales for the full '07, by market, were composed of approximately 69% from commercial aviation, 16% from defense and space, and 15% from other markets, which include industrial, medical, electronics and telecommunications.

Dropping down to operating income, consolidated operating income in the fourth quarter of '07 increased 36% to slightly under $24 million, up from $17.6 million in the fourth quarter of '06. Consolidated operating income in the full fiscal '07 increased 29% to a record $86 million, up from about $67 million in the full fiscal '06. Operating income of Flight Support in the fourth quarter '07 increased 33% to $17.3 million, up from $13 million in the fourth quarter of '06, and increased 44% to $67.4 million for the full fiscal '07, up from $46.8 million in the prior year. These increases principally reflect higher net sales as well as operating efficiencies.

Operating income of Electronic Technologies in the fourth quarter of '07 increased 17% to a record $10.5 million, up from $9 million in the fourth quarter of '06 and totaled $33.9 million for the full fiscal '07 or approximately the same as reported in the prior year.

Corporate expenses in the fourth quarter '07 were $4 million, versus $4.4 million in the fourth quarter '06 and $15.3 million for the full fiscal '07, versus $14 million in the prior year. As a percentage of sales, corporate expenses have declined to 2.8% in the fourth quarter of '07 and 3% in the full fiscal '07, down from 4% and 3.6% in the comparable periods of fiscal '06. That's a nice pickup for the Company.

Operating margins, consolidated for the fourth quarter of '07, were 17%, up from 16% in the fourth quarter of '06. Consolidated operating margin of 16.9% for the full fiscal '07 was in line with our expectation and approximated the 17% reported in the prior year. Operating margins of Flight Support increased to 16.8% in the fourth quarter '07 from 16.5% in the fourth quarter of '06 and improved to 17.6% for full fiscal '07, up very nicely from 16.9% for the full fiscal '06. Operating margins in Electronic Technologies were 28.4% for the fourth quarter of '07 and 27.3% for the full fiscal '07, versus 28.8% and 29.6% in the comparable periods in '06. The decrease in operating margins in '07 had been anticipated and principally reflects a less favorable product mix in '07. Overall, however, I want to point out that we believe that operating margins for ETG remain extremely strong.

Diluted earnings per share increased 14% to $0.40 in the fourth quarter of '07, up from $0.35 in the fourth quarter of '06, and increased $0.25, or 21%, to $1.45 for the full fiscal '07, up from $1.20 in the prior year.

Depreciation and amortization approximated $3.2 million in the fourth quarter '07 versus $3.9 million in the fourth quarter '06 and increased to $12.2 million for the full fiscal '07, up from $10.6 million in the prior year. This is due to increased amortization of acquired intangible assets relating to recent acquisitions.

Research and development expense was approximately $4.7 million in the fourth quarter and $16.5 million for the full fiscal '07 versus $3.1 million in the fourth quarter and $15.3 million for full fiscal '06.

The addition of new FAA PMA approvals continues to be a critical strategy supporting our long-term growth. We now have over 6000 parts approved by the FAA. New parts released by our R&D groups in '07 total approximately 400, which was consistent with our expectations, and we are targeting 400 new PMA certifications for fiscal '08. We also have a number of new products under development in Electronic Technologies.

As I've mentioned many times before, we do believe that our focus on continuing new product development is fundamental to our growth strategy. This strategy has proven very effective over the years.

SG&A spending, as a percentage of net sales, decreased to 17.7% in the fourth quarter '07, down from 19.8% in the fourth quarter of '06, and decreased 18% for the full -- I'm sorry, and decreased to 18% for the full fiscal '07, down from 19.3% in the full fiscal '06. The decreases principally reflect deficiencies through cost controls and the increase in sales volume. The increase in absolute SG&A expense to $91.4 million for the full fiscal '07 was up from $75.6 million for fiscal '06 and is due principally to higher operating costs, primarily personnel-related, associated with the growth in sales and includes the impact of our acquisition.

Interest expense the fourth quarter of '07 was $855,000 versus $896,000 in the fourth quarter of '06. This was due to lower average balance outstanding and slightly lower interest rates. During the full fiscal '07, we borrowed $46 million under our revolving credit facility, principally to fund acquisitions that we completed in '07. Using the cash provided by operating activities, we made repayments of $46 million, exactly the same amount borrowed, including $17 million in the fourth quarter of '07.

I would, at this point, like to mention that we think that the strategy that we employ, the leverage strategy and our use of cash, our ability to generate cash and grow the Company without having additional capital infusions, selling more shares, doing convertible bonds, and still being able to grow topline and bottom-line at nearly 20% for a long period, is really a complement to the management people that run this company. We watch cash flow like a hawk and to me, I want to mention that cash flow is king. It's paramount to earnings per share. I know one thing -- that a company the can generate enough cash to repay all of its borrowings in the same year, I feel our people are doing an extraordinary job.

Interest and other income in the fourth quarter in fiscal '07 were really not significant; I won't concentrate on that.

Our income tax rate was 34.1% in the fourth quarter '07, up from 27.8% in the fourth quarter '06. The large variance in the fourth-quarter effective tax rate is principally due to the benefit of an income tax credit for qualified research and development activities that the Company claimed for certain previous tax years, and that was filed in the fourth quarter of '06. So the fourth quarter of '06 was abnormally low.

The aggregate tax credit, net of expense, increased net income by about $800,000 or $0.03 a diluted share in the fourth quarter of '06.

Our effective tax rate for the full '07 was 33% -- 33.2%, up from 32.7% in full fiscal '06, due principally to the phaseout of extraterritorial income exclusion provisions pursuant to the American Jobs Creation Act of 2004 that had resulted in a tax benefit on export sales, partially offset by a higher amount of minority interest shares of income excluded from the Company's '07 consolidated income, subject to federal income tax. The minority interest share of our consolidated income was $4.3 million in the fourth quarter of '07 and $2.9 million in the fourth quarter of '06. The increase from the fourth quarter '06 is principally due to higher earnings within the Flight Support Group. Minority interests relate 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, and the minority interest held in certain Electronic Technology subsidiaries.

Moving onto the balance sheet and cash flow, as you can see from our statements and our release, the financial position and cash flow remain extremely strong. Cash flow from operating activities was a record $57.5 million for fiscal '07, including $20.2 million generated in the fourth quarter of '07, up from just about $47 million for the full fiscal '06. Working capital ratio was strong at 2.5 as of October 3107, comparable to 2.7 a year ago October.

DSOs and receivables equaled 54 days as of October 31, '07 and '06. We continue to closely monitor receivable collection efforts to manage our credit exposure. I can also comment we have very little loss from receivable noncollection.

The inventory turnover rate as of October 31, '07 improved to 128 days as compared to 142 as of October 31, '06. We've seen some very significant improvements in the Flight Support Group as a result of concentrated efforts to improve the turnover, and our people are doing an excellent job.

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

Our long-term debt to capitalization decreased to 13% as of October 31, '07, versus 15% as of October 31, '06, still extremely low. We feel that, again, we have been able to grow very significantly by funding, internally funding, essentially, our acquisitions.

In the outlook, we see things for '08 and beyond, and we believe that our commitment to develop new products and services, increase product demand from customers, strong financial position, our ability to identify and select acquisition/niche acquisition opportunities, provide the foundation for continued growth in sales and earnings. Based upon current market conditions, we're targeting '08 12-month net sales in the range of $575 million to $580 million, operating income in the range of $100 million to $103 million, and diluted net income per share in the range of $1.73 to $1.76. Fiscal '08 cash flow from operating activities should approximate $70 million, and our CapEx budget for '08 approximates $19 million, which includes about $7 million of capital expenditures deferred from '07. Note carefully that capital expenditures totaled slightly under $13 million in '07, which was about $6 million, $6 million to $7 million less than the original budget of $19 million, and those $6 million or $7 million have been pushed into '08.

Historically, as my own commentary on this, we asked the business heads to give us an estimate of their capital expenditure needs. They realized, if they don't have it in the budget, they're not likely to get it later on in the year, so the kind of put their entire wish list in. Normally, our CapEx budget is greater than what we actually spend in any particular year. Personally, I wouldn't be surprised to see that, but I'm giving you a bottoms-up analysis of what our business drivers, leaders tell us that they will need.

In closing, we continue to adhere to a long-term strategy of developing and marketing new products and services, which provides our existing customers with improved technology, substantial cost savings that allow us to expand our markets. We believe that this strategy has resulted in a strong financial position and positions us with the opportunity for substantial forward growth.

I would like to take this moment to thank all of HEICO's team members, shareholders, stakeholders and supporters for their continued support to the Company. We have an outstanding team member group. They work very hard, are really focused. Without their active participation and support, we could not operate the Company in the manner that we do.

That is the extent of my prepared comments. I would like to open the floor for any questions. I probably will request that some of the questions be handled by Eric, Tom or Victor. Thank you.

(OPERATOR INSTRUCTIONS). Arnie Ursaner, CJS.

Good morning. First of all, congratulations on a very good quarter, very good year. It seems to be the pattern you have.

A real quick question I have is two forward-looking arrangements you have -- but perhaps you will be willing to expand on a little bit. One is just perhaps an update on British Airways and how you are doing there. The second is Lufthansa -- you obviously have had strategic and very critical relationship with -- announced a partnership where they're going to be more exposed to JetBlue. Perhaps you would comment on your exposure currently to JetBlue and how you might see that evolving going forward.

Arnie, in general, with regard to the first one, which we announced that we had an understanding or affiliation with British Airways, that's in-process; it's building; I think it's doing very nicely. They are a wonderful airline; they are a major airline. The relationship I think is solidifying. We don't drill down, for competitive reasons, and give sales, as you know, by individual customers.

As for the second one, I have to be careful because we haven't made any public announcements. We recognize that Lufthansa has taken this interest. I was with Wolfgang Mayrhuber at our Board meeting over the past weekend and had dinner with him a number of times. We discussed it. I guess what we agreed to say was that you are completely correct that we have an extraordinarily strong relationship with Lufthansa. Lufthansa is a very good customer of ours; we don't specify exactly how good, and our relationship is outstanding with them, the fact that they now will have 19% of JetBlue and I'm sure will have input into some of JetBlue's policies and so forth. I'm just going to leave it at that and let you draw your own conclusion.

Well, just to (multiple speakers).

You know, I can't predict. At this point nothing is changed and to go into the future, but you know, I think that we have this extraordinary relationship with Lufthansa, and I would think that there's certainly no downside with regard to JetBlue. We will have to see what the future holds, but I'm optimistic and hopeful that it should be a positive for us.

Well, that's really where I was going. JetBlue has had primarily OEM relationships and have had minimal aftermarket purchases because a lot of their products have been warrantied, if you will, by the manufacturer. To the extent you've had minimal business, this should only be an upside opportunity for you over the next few years. Is that a fair way to think about it?

Again, I can't drill too far but we are very optimistic and positive with that. JetBlue is a wonderful carrier, and I'm sure that JetBlue is going to receive not just money -- $300 million from Lufthansa -- but our experience in dealing with Lufthansa is, you know, they are so helpful on the technical side and they are very strategic and they are very, very smart in the way they conduct business, and they are just a pleasure to deal with. So, I would think that JetBlue is going to benefit significantly by their relationship with Lufthansa.

The last question and I would jump back in queue -- a general view of the -- I know you've been disciplined in years in your acquisition policies. What are you seeing among the target out there? Is there more realism? Are they more aggressive on pricing? What are you seeing generally among potential targets?

We don't really see any change in the pricing. I mean, people, sellers we've known in up-and-down economies. Sellers take a couple of years to become really realistic, and a lot of sellers realize that, if business, if prices have dropped, they're going to wait for the next cycle.

So normally, when conditions are what they are today, the pricing really doesn't change significantly. I don't think there are any bargains out there. We see about the same number of opportunities that we've seen in the past, but really no bargains in pricing.

Thank you very much.

Arnie, also, this is Eric. Just to expand for a moment on your BA question, as my dad mentioned, we're doing very well with BA. We also, as you know, are responsible for their entire PMA program. We've met with a lot of success on finding new sources and partnership opportunities where we've been able to expand our product line and found people who manufacture items that BA can use that we didn't manufacture in the past and actually these companies hadn't even PMA-ed them but HEICO of course can obtain the PMA and partner with these folks and supply them onto BA. That has met with a lot of success.

Again, congratulations.

Tyler Hojo, Sidoti & Co.

Good morning, guys. I guess my first question, just in terms of the guidance that you provided for fiscal '08, I'm wondering how many PMA part introductions are kind of implied in that revenue forecast.

Well, we say that we're going to introduce about 400 new parts. That's pretty standard for us. You know, I would say that those are the parts that we produce and develop internally, so we are about 400.

Okay. I guess this might have some parallels to the British Airways question, but of those 400 new parts, how many would you say are on Rolls-Royce engines?

How many? I'm going to turn that over to Eric.

Yes, we don't disclose the breakout by platform, but Rolls-Royce has not been a primary focus for us thus far.

Would you maybe characterize if that focus has shifted somewhat recently or you prefer not to?

Well, I would say certainly the opportunity exists. We need to be careful what we say before we come out with our product line, but certainly the opportunity exists for us.

Okay, that sounds good. Just in regards to the EMD Technologies acquisition, which was made in September, could you give us some sort of understanding of what kind of revenue contribution that's going to have (inaudible) fiscal '08?

Tyler, this is Tom Irwin. The EMD transaction, we did (technical difficulty) fiscal '07 is a typical HEICO niche acquisition. We did not, based on its size, indicate specific revenue or financial information, but it does fit again within, again, our typical ETG acquisition, which we have historically identified as typically a company that has revenue of $10 million to $20 million annually and operating margins in the about 20% range, approximately, and the targeted purchase prices are typically 5 to 7. So within those parameters is all we are at this point able to identify specifically.

Okay, that's fine. One final one and then I will jump back in the queue -- I know Larry commented on this a bit but the big increase in the planned CapEx budget for next year -- I was hoping that maybe you could quantify some of the bigger items on that "wish list".

Tyler, this is Tom Erwin. Of the $19 million in budgeted expenditures for next year, I would say it's probably, round numbers, 30%, 40% facilities, 50% machinery/equipment, including technical equipment, and the balance typically IT structure and IT systems-related, round numbers.

Okay. I guess just a follow-on to that, I guess -- I know it's difficult but if you could quantify where company-wide capacity utilization is currently tracking.

Are you talking in machinery and equipment or by subsidiary?

Machinery and equipment.

I think the major -- is in the major machinery and equipment. I don't have the breakdown in front of me

I think Tyler's question, you are asking about capacity. Do we have additional capacity? I think the answer is yes. At our existing facilities, we have sufficient capacity to manufacture our current requirements and anticipated in the foreseeable future, if that's your question.

Yes, that covers it. Thanks a lot, guys.

Chris Donaghey, SunTrust.

Good morning, guys. Good quarter.

Larry, I was wondering if you can help me on understanding the guidance; it's a little different from the last couple of years where we've seen your topline guidance come in typically higher than -- the more your guidance is on a percentage change basis versus the earnings per share guidance. This next year, you are implying some pretty significant margin expansion. So can you just walk us through how you get that margin expansion? Is the distribution business starting to slow down now some and the PMA business starting to grow faster than that business, or again, any light you can shed on that would be great?

Because of our reporting requirements and everything else, I would have to summarize it by saying that we, internally from the bottom-up, we see stronger growth in higher-margin businesses, which is great for us because that just plays to our strength of cash flow, and that's great.

Now, as you know, our next year's projections have virtually little acquisition numbers. I think there's some consideration for things that we feel very confident of, but it's possible that the topline growth, due to acquisition, might be bumped up later in the year as we hopefully close certain acquisitions. But at this stage, it's just because of mix and a greater growth in the higher-margin kind of businesses.

Okay, great. On the acquisition front --

Incidentally, just one other comment, Chris -- that I have always told investors that we focus on the bottom-line, which we do. I know Wall Street likes to see topline growth and I understand why, and we like to see that, too. But we really focus on the bottom line and trying to squeeze out the greatest profits from what we have. I think that's coming through more and more, and as I say, working capital -- if you can grow on the bottom-line in margin and earnings per share without having a commensurate growth on the topline, that has the effect of reducing inventories and receivables and reducing our need for working capital. That's really stuff that we like to see. That's the reason.

Well, actually, I view this as a welcomed positive, seeing the margin expansion as an opportunity there. So it definitely was not a complaint; it was more actually a favorable comment.

On the acquisition side, should we expect the acquisition balance to be any different shifted towards Electronic Technology Group or Flight Support? Could you just kind of walk us through the pipeline that you're seeing there?

You know, Chris, we are an opportunistic acquirer. As you know, we don't reach out and pay very high prices. Wherever we see the opportunity, that's where we will make the acquisition. It could be in ETG; it could be in Flight Support where Bill Harlow, who is our M&A guy, tells me he looks at 100 transactions to do 1. So you know we just look at a lot of transactions. I really couldn't say -- I do know, at this point, where they will be. But I kind of assume they will be similar to the past, and that's not that I know anything more but it's kind of a logical assumption. We are aggressively looking in both places. We don't favor one or the other. We just want to see the transactions that make the most sense for HEICO as a corporate entity.

Great. One just quick housekeeping question, Tom. What is the expected tax rate going to be for fiscal '08?

Based on our current look, I would say it will probably go up about 1%. That's basically, as we mentioned earlier, the R&D credit, which is really a two-year credit for us because of the timing of when Congress extended, it reduced our effective rate by about 2%. So in the normal course, our one-year R&D benefit would be 1%. So, based on that, I would say it will probably go up again by about 1%.

Okay, great. Thanks.

J.B. Groh, DA Davidson.

Good morning, guys. Congratulations. A couple questions for Eric on the catalog -- I think, Larry, you mentioned 6000 parts in the catalog. That's the total number of PMAs, correct? That's not necessarily the active portion?

That's correct, J.B.

So, I think, in the past, you've given us kind of an active number. Is it two-thirds of that or --?

Yes, two-thirds would be a good number, around 4000.

Okay. Then when you look at this 400 number, I mean that's remained relatively constant over time in terms of the number of parts you think you can develop. That's basically an FAA bottleneck there, correct? I mean, there's nothing that can't get you beyond that, really?

No. At this stage, it's really not so much FAA as much a marketing issue, because I give the analogy, if we have 400 parts, take our top 20 customers and that's 8000 SKUs that we must get approved off of 20 different airlines. It's just a voluminous task. In other words, some of our profit is going to hire additional representatives at airlines just to manage getting these things approved. So the bottleneck is, I would say is much or maybe more on the marketing side, just getting them approved.

Now once they get approved, as I think you know, it's almost on automatic reorder, because once the purchasing department and the engineering department and everybody enter the part, a HEICO part in the system, it's a no-brainer because the purchasing agent is going to pay substantially less, hits the button and it's reordered electronically the next morning. So our biggest job is to get the parts approved by the airline.

The FAA has been very cooperative. We have a very good relationship with the FAA. From an engineering point of view, most people have told us that our submission packages are outstanding and we really, in some cases, over-engineer the replacement parts. But we want to make sure that we differentiate ourselves from -- we don't even use the word "PMA" in the marketplace hardly at all. We talk about HEICO alternative parts because, believe it or not, there is a different quality issue in technical development that we do compared to virtually any other developer of PMA. So, it's really getting it approved by the airline is more the limiting factor today than the FAA. The FAA is very cooperative. It sounds strange that the airline wouldn't say "come on; approve this." At the upper levels, normally they do. But sometimes at the lower levels, the bureaucracy, you know, they have other things to do and they are busy, and they don't get them approved as quickly as we might like.

In terms of your new parts development, is most of that still engine or how is the mix between, say, engine parts and other on what you're developing now and what you kind of plan to develop in the future?

I'm going to ask Eric to respond.

Yes, it's probably about two-thirds engine, one-third aircraft controls and accessories.

Okay. But it's pretty safe to say that your penetration on like the trend platforms and GE-90 is pretty minuscule, correct? I mean, that represents (multiple speakers).

Correct. Yes. Your correct.

Then one of the things -- I think I probably asked this question in the past, but when you look at, say, the potential market value of those 400 new parts that go through, is that relatively constant? Because it seems to me that value would kind of drop over time as you kept the low-hanging fruit on an engine and then less-attractive parts down the line. How do you kind of keep that potential value high?

Okay, actually, the 400 number is higher than it has been in the past, but I think last year was probably a little bit fewer. But we I think see potential to actually upsize that number. There are still parts, that when we review consumption and usage, there are additional parts which we discover meet our either financial or technical capabilities, and we're able to continue replenishing the pool. So I would actually assume that 400 number will grow over time.

Well I'm not so concerned about the number as the market potential for those parts. Do you follow me? (multiple speakers)

Sure. We actually look at both, and I'm glad you (multiple speakers) that, because you're right. People like to know how many PMAs you've got, so that's why (multiple speakers) but you're absolutely right. The way we look at it is market potential.

Likewise, when I say the number of PMAs, I mean the quantity of PMAs as well as the market potential (multiple speakers) we continue to grow over time.

Okay, that's good clarification. Thanks a lot, guys, and congratulations on the year.

Chris Quilty, Raymond James.

Good morning, gentlemen. I hate to kill this question again, but on the CapEx, just a general question -- when you go out and start developing new parts, potentially, for a supplier Rolls that you haven't previously PMA-ed parts for, does that incur any capital cost or can you generally leverage the existing production equipment that you have in place?

We can generally leverage the existing production equipment.

Okay, great. Most of my other questions have been asked, but I was wondering if perhaps Eric could just give us kind of an overview. You've got some pretty decent growth projections with regard to the Flight Support end of the business. Looking back, it has been, I think, 14 out of the past 15 quarters, double-digit organic growth. Just if we can get sort of an overview on what you see happening in the industry landscape that could sustain the type of growth, or whether there's any risk factors you see out there, either company-specific, airline fuel prices, and how that may play into your demand.

This is Eric, Chris. That's a good question. We see continued strong enthusiasm and support for our products. You know, we started out with Lufthansa as the initial partner, and now that's grown far beyond Lufthansa and of course British Airways has no come on board. After British Airways came on board, a number of other non-users around the world realized that they should be looking at it, too.

So I think that the enthusiasm and support for what we're doing is only growing, and I would anticipate just continued growth and continue doing exactly what we're doing. We are finding existing additional products. I mean, now that we are the sole PMA source for British Airways and we're doing all of their sourcing, we are finding all sorts of very interesting areas that we had not been in, in the past. We had primarily been in an engine parts supplier. For the last seven years or so, we've grown into the largest PMA supplier in the controls and accessories area, but we found many additional parts outside of the traditional baskets that we used to look in. So I would anticipate this to continue.

You mentioned fuel prices. Whenever fuel prices go up, obviously that squeezes the airlines. They have to look for additional cost savings. So I would think that bodes well for our business. I mean, we want to make sure that the airlines stay healthy and are able to pay their bills. We all believe that they certainly will be able to do that, but as fuel goes up, they're going to have to further cut costs and we play prominently into those areas.

Okay. Airline, the carrier trends towards things like using regional jets, I think your last major acquisition there was more than five years ago with Future Aviation. Is that or things like the military PMA parts potential opportunities or are there other things that are higher on the pecking order?

No, I would say both of those areas are of great interest, the regional market. We do a lot of work in the regional area, from repair and overhauls, distribution, PMA. That remains of great interest to us. I think the military is a great market potential for us, and we're just continuing to do everything that we've always done.

Great. Thanks a lot, and keep up the good work, guys.

(technical difficulty) [Calyon] Securities.

Good morning, guys. Nice quarter. Can you talk about any growth trends that you're seeing out of any specific geographies? Is there anything that really sticks out in your mind?

Well, when we do a PowerPoint presentation at any of the aerospace conferences that Wall Street gives, we have a chart that has shown our growth from (inaudible) over three-quarters of our business in the Americas to how we are expanding into Europe, Middle East, and the into the Far East. So if you look at that chart, it shows the Americas on the left side and Europe in the middle and Japan and China on the right. There's a movement, in terms of percentage of our revenue, and the movement is going from west to east.

So we think that, clearly, the Middle East and the Far East are becoming fertile markets. We have our tentacles in China already. We are looking at India through Lufthansa, at the Middle East and so forth. So I think that we're going to continue to see more opportunities in foreign markets than we've seen in the past. In fact, historically, it has shifted over the past ten years. We're doing significantly more business in the Middle and Far East and Europe than we've done in the past. So we were, ten years ago, over 75% of our business was in North and South America. Today, it's below 50%. That shift has gone both to the Middle East and Europe and the Far East. That's a great thing because, as Eric pointed out earlier, where you have a major airline such as British Airways that has an outstanding reputation for quality and so forth, and they had a no-alternative parts policy -- notice I didn't say PMA, I said alternative parts -- and after working and working and working and trying to educate them and so forth, when they had management changes and the new CEO and engineering staff, they began to realize that HEICO alternative parts were really going to save them a tremendous amount of money. This is the same kind of education that a lot of airlines are picking up. So we think that of course that's positive, and we see the growth continuing.

James Foung, Gabelli.

Let me just echo everyone else's comments; congratulations on a good quarter and a year, and you should be proud of you and your team.

I guess, just to touch off on the last comment, Larry, early last year, you signed an agreement with the China Aviation Import Group I guess to do some joint cooperation. Could you just kind of give us an update in terms of how things are developing between you and the China Aviation Group?

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

Yes, things are developing very nicely. As you know, there are a lot of people folks that we've got to speak with within China. We're making very good progress in that area and we're very optimistic for the future.

That infrastructure is building, as you know. There's an enormous -- I mean, they are going to have 3000, 4000 thousand aircraft over there, over the next 20 years. They are building their infrastructure. You and I have talked about this, and you know, they are building airports and infrastructure, buying aircraft, and that opportunity is going to come on. I think we are going to see it growing and growing. It's a place that you have to be involved early on and make relationships and develop them, and do things. But in my opinion, that's clearly going to start to blossom over the next three to seven years, and it should get strong. If we do the right thing it's going to get stronger and stronger.

So it's kind of within like a three to five-year time frame where we could see contributions from that kind of joint venture there. Is that the same way I should look at possibly the Trent engines and the Genex engines, where I look out three to five years that you could possibly do something in those type of engine platforms?

Well, I'm not sure. First of all, if I knew the answer to the question, I wouldn't say it publicly because we always -- we don't want to give our competition any advanced notice on products and things that we're developing.

You know, we have just enormous market opportunity in the engines that we service right now. That doesn't mean to say if there are significant population growths in other types of engines, that we won't seize on that opportunity. But unfortunately, or fortunately, there are so many opportunities for us in parts, engine parts, parts and accessories, all types of alternative parts, that, you know, our big job is to prioritize which ones we want to go after. A lot of the has to do with market, marketing, demand from airlines, airlines that buy a lot of our product, and what they want.

We're very responsive to the customer. If the customer says if XYZ Airlines says gee, we need this particular part, and we really need it very badly, you can bet that we're going to make it for them. So I think a lot is market-driven, customer-driven.

Fair enough. I guess, related to that, can you expand your customer base? I mean, you are kind of reaching out to just about roughly, what, 200 customers in one of you charts, but I guess the top customers is a smaller number. Is it possible you could expand the number of customers you deal with so that you can kind of work around the marketing limitations that each airline (inaudible) by having more customers?

The answer is yes. We sell, now, 17 of the 20 largest airlines in the world, in our parts. We do business with all 20 in one segment of our Flight Support Group or the other, so we are currently doing business with all of the top 20, but from a parts point of view, there are three airlines that are still holdouts. We believed, until last year, British Airways was one, so we were selling 16 out of the top 20. Now we're selling 17. A lot of people follow -- as Eric mentioned earlier, a lot of people will follow the lead of British Airways, and they realize that if British Airways is buying the parts, we will, too. So I believe that the three holdouts, two of the three I certainly believe that, in the near future, they will come into the fold and buy parts. The third one, I don't know. They are a little harder, but in they will, ultimately the will. But yes, we can.

Then you have some of the Chinese airlines that are flying Russian airplanes and so forth. As they go to Airbus or Boeing aircraft and engine products and U.S.-made accessories, Western World accessories, they are going to become customers. So those airlines will come in, too.

Okay, great. Then my last question is, when you look at your debt to total capital ratio of about 13%, how do you view that? Do you think that's under-leveraged, or do you think that's kind of the right amount of leverage you want to be in, or what's your kind of vision of where you think the leverage of this company should be?

Well, I think that, because of our ability to grow cash flow the way we do -- and as I pointed out, we borrowed $46 million last year to make acquisitions, and we paid it back of our own cash flow. You know, it was a short-term loan.

I like to go on low leverage; I think it's a good thing. Some people have criticized us, said "Your return on equity could be more if you --". I'm not into financial gymnastics. I'm a financial person and I understand them very well, having been in the real estate business many years. I understand leverage as well as anybody else. I feel that as an operating company supporting airlines, we have to be able to write a check and to increase our R&D as we had to do after 9-11. We've got to be there to be responsive to the customer. When you are a heavily leveraged company, it makes it more difficult to do that. Leverage is a two-way street, as you know, and it cuts both ways. So at the moment, I am very comfortable and the Board is very comfortable with low leverage.

Now, saying that, if a great opportunity came along where we had to borrow $500 million, I don't know, $800 million, we could do it. HEICO has the firepower to do it. We are very underleveraged. So if an opportunity, a once-in-a-lifetime opportunity comes along, as I say, we are opportunistic and we could take advantage of it. So that's another reason that we like the low leverage. We could make any reasonable transaction that we want to make. But in the meantime, we've been able to grow at a compound rate of about 20% top and bottom line, and our stock has compounded at 24% using the tactics and the strategy that we use. So you know I'm happy with that. I think the shareholders are happy with that. I'm really -- I'm the largest shareholder, so I look at it and say "How beneficial is this to all of the shareholders?" Because whenever I do for myself, and I do for thousands of other shareholders. The response that I get overwhelmingly is, "Hey, just continue doing things the way you're doing it because it works out." So I think, unless something very unique and very opportunistic comes along, kind of a once-in-a-lifetime thing, we are likely to stay low leverage.

Well, it has been working out. Congratulations.

Tim Curro, Value Holdings.

Just one minor question -- do you have your fiscal year-end count?

I'm sorry? Fiscal --?

Year-end headcount, number of employees?

Oh, do we have the number of employees?

It's a little over 2000.

So like 2200?

Yes, roughly. That would include some temps, but full-time permanent is around a little over 2000.

Thank you.

There are no more questions on the line at this time.

Okay, well, I do want to thank all of you for your interest in HEICO. As you know, we are all available by phone, e-mail, if you have other questions, want clarification if we can help you on it. Again, I thank you for being interested in HEICO and wish you a very happy holiday season. We will talk to you at the first-quarter conference call, earnings conference call. Thank you all. Bye-bye.