HEICO Corp (HEI) 2008 Q2 法說會逐字稿

Welcome to the HEICO Corp. fiscal 2008 second-quarter earnings conference call. I will now turn you over to the host, Laurans Mendelson.

Thank you very much and good morning to all the people on the call and thank you for your interest in HEICO Corp. I'm Larry Mendelson, I'm the CEO of HEICO and I'm joined this morning by Eric Mendelson, President of HEICO's Flight Support Group; Victor Mendelson, President of HEICO's Electronic Technologies Group as well as its 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 made in today's conference call will constitute forward-looking statements which are subject to certain risks, uncertainties and contingencies.

HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors including, but not limited to -- lower demand for commercial air travel or airline fleet changes which could cause lower demand for our goods and services; product specification costs and requirements which could cause an increase to our cost to complete contracts; governmental and regulatory demand; export policies and restrictions; reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors which could reduce our sales; HEICO's ability to introduce new products and product pricing levels which could reduce our sales or sales growth; HEICO's ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest rates; 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 internal controls which could adversely affect our business and the market price of our common stock.

Those listening to today's call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission including, but not limited to, filings on forms 10-K, 10-Q and 8-K. We undertake no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise. Thank you.

Thank you, Victor. Now before reviewing our second-quarter operating results in detail, I would like to take a few minutes to summarize the highlights of another outstanding quarter. Both Flight Support and Electronic Technologies reported higher sales and earnings in the second quarter of '08 combining for an overall 19% improvement in consolidated sales and a 25% increase in operating -- in consolidated operating income over the second quarter of last year.

Our consolidated second-quarter net sales and operating income represents all-time record quarterly results. Consolidated operating margins improved to 18.3% in the second quarter '08, up from 17.4% in the second quarter of the prior year. The higher sales contributed to a 27% increase in consolidated net income over the prior year's second quarter.

In the second quarter of '08 we completed our 38th acquisition since 1990 with the addition of a small FAA approved repair station. Further, as announced earlier this week, we're gratified to more than double our revolving credit facility from $130 million to $300 million during a time of credit market difficulties.

The facility was oversubscribed and our banking syndicate of high-quality banks led by SunTrust and JPMorgan showed great confidence in HEICO due to our strong historical performance and outlook. We believe that each of these events provide further indication of the concentrated efforts for long-term sustainable growth at HEICO.

Moving on and drilling down into the specifics, consolidated net sales in the second quarter increased by $22.8 million to a record $144 million or it was up 19% from the second quarter of '07, reflecting strong revenue growth of 25% within Electronic Technologies and 17% within flight support.

Net sales of Flight Support increased to a record $108 million in the second quarter of '08, up from $92.4 million in the second quarter of '07. The increase in Flight Support's revenue represents strong organic growth of approximately 12% and four bolt-on acquisitions completed since the second quarter of last year. The organic increase in Flight Support's revenue reflects our success in developing and bringing to market new products and services.

Net sales of Electronic Technologies increased to $36.1 million in the second quarter '08, up from $28.8 million in the second quarter of '07. This increase reflects organic growth of approximately 14% and the impact of two prior year acquisitions. Our net sales for the first half of '08 by market were composed of approximately 69% from the commercial aviation industry, 15% from the defense and space industries, and 16% from other markets which includes medical, telecommunications and electronics. This sales mix is the same as what we experienced for the full year fiscal '07.

Overall consolidated net sales increased 18% to a record $278.3 million in the first half of '08, up from $234.9 million in the prior year. The $43 million increase is represented by approximately $31 million attributable to organic growth and $12 million attributable to acquisition.

Moving on to operating income, our consolidated operating income in the second quarter of '08 increased 25% to a record $26.4 million, up from $21.1 million in the second quarter of '07. Consolidated operating income in the first half of '08 increased 30% to a record $49.6 million, up from $38.2 million in the first half of '07.

Operating income of Flight Support in the second quarter '08 increased 14% to a record $20.4 million, up from $17.9 million in the second quarter of '07. Flight Support's operating income in the first half of '08 increased 22% to a record $39.3 million, up from $32.3 million in the first half of '07, reflecting an increase in net sales and strong operating margins resulting principally from a more favorable product mix.

Operating income of Electronic Technologies in the second quarter '08 increased 32% to $9.8 million, up from $7.4 million in the second quarter '07. Electronic Technologies' operating income increased 29% to a record $16.9 million in the first half of '08 versus $13.1 million in the first half of '07, reflecting an increase in net sales, higher operating margins and those resulted from a more favorable product mix.

Corporate expenses in the second quarter of '08 were $3.8 million versus $4.2 million in the second quarter of '07 and were $6.7 million in the first half of '08 compared to $7.2 million in the first half of '07 as we continue to focus on lowering regulatory compliance costs.

Operating margins of Flight Support were 18.9% for the second quarter '08 versus 19.3% for the second quarter '07 and improved to 18.7% for the first half of '08, up from 17.9% for the first half of '07, reflecting variations in product mix. Operating margins of Electronic Technologies improved to a strong 27.1% for the second quarter '08, up from 25.6% for the second quarter '07 and increased to 24.9% for the first half of '08, up from 24.1% in the first half of '07, again reflecting a favorable product mix.

Consolidated operating margins improved to 18.3% for the second quarter of '08, up from 17.4% in the second quarter '07 and increased to 17.8% in the first half of '08, up from 16.3% for the first half of '07, and this reflects principally increased gross profit margins and increased operating efficiencies within SG&A. We expect comparable consolidated margins for the full fiscal '08.

Diluted earnings per share increased to a strong -- by a strong 26% to $0.44 in the second quarter '08, up from $0.35 in the second quarter '07. Depreciation and amortization expenses increased to $3.8 million in the second quarter of '08, up from $3 million in the second quarter of '07, and the increase is primarily due to increased amortization of acquired intangible assets and depreciation of acquired facilities and equipment relating to certain acquisitions.

Total research and development was approximately $4.3 million in the second quarter '08 versus $4 million in the second quarter '07. As you know, the addition of new FAA PMA approvals continues to be a critical strategy to support our long-term and medium-term growth. We now have over 6,000 parts approved by the FAA and we're targeting approximately 400 new PMA certifications in '08.

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 has proven very effective over the years and we intend to continue it and to accelerate this development.

SG&A expenses as a percentage of net sales decreased to 18% in the second quarter '08, down from 18.6% in the second quarter '07, principally reflecting efficiencies realized on higher sales volumes. The increase in SG&A expense to $26 million in the second quarter '08 from $22.6 million in the second quarter '07 is due principally to higher operating cost, primarily personnel related, associated with the growth in sales and includes the impact of recent acquisitions.

Interest expense in the second quarter '08 decreased to $645,000, down from $860 million in the second quarter '07; this reflects lower interest rates partially offset by a higher weighted average balance outstanding under our revolving credit facility. During the second quarter of '08 we made net payments of $9 million under our revolving credit facility and we paid off the mature industrial development revenue bonds aggregating $2 million. So total debt reduction was 9 plus 2 or 11.

Interest expense and other income in the second quarters of both years, not significant and I won't comment on it. The Company's effective tax rate was 34.8% in the second quarter of '08, 34.5% in the first half of '08 compared to 34% in the second quarter of '07 and 32.3% in the first half of '07. These increases are principally due to the benefit of an income tax credit for qualified research and development activities which the Company recognized for the full fiscal '06 year during the first half of '07 upon the retroactive extension of these tax credits.

The aggregate tax credit net of expenses increased net income by approximately $500,000 or $0.02 per diluted share in the first half of '07 and by approximately $200,000 or $0.01 per diluted share for the second quarter of '07.

Just a comment for the analysts out there -- this really shows that our earnings in '08 were even stronger, pre-tax earnings and the quality of the earnings in the business were even stronger in '08 than the GAAP numbers show -- if you factor in the little bump that we got in the prior year for income taxes.

The minority interest share of consolidated income was $4.8 million in the second quarter of '08; it was $4 million in the second quarter of '07. The increase from the second quarter of '07 is principally attributable to the higher earnings within flight support, of which Lufthansa has a 20% ownership interest, as well as higher earnings within certain subsidiaries of Electronic Technologies in which minority interests do exist.

Moving on to the balance sheet and cash flow -- as you all can see, our financial position remains extremely strong. Cash flow from operating activities in the first half of '08 total $35.2 million including a very strong $25.4 million generated in the second quarter of '08. And this is up from $21.9 million in the first half of '07. Working capital ratio strengthened further to 3.1 as of April 30th versus 2.5 on October 31, '07.

DSO's of accounts receivable equaled 52 days as of April 30, '08 down from 54 days as of October 31, '07. We continue to closely monitor receivable collection efforts and to manage our credit exposure in light of the financial challenges which face some of our customers. The inventory turnover rate as of April 30 was 121 days versus 124 as of January 31, and 117 on October 31, '07.

No one customer accounted for more than 10% of net sales and our top five customers represented approximately 21% of consolidated net sales in the second quarter of '08. Our long-term debt to capitalization ratio of 12% as of the second quarter of '08 approximates the 13% on October 31, '07. And as you can see and you know, our leverage ratio continues to remain extremely low. CapEx in the first half of '08 were just shy of $7 million.

The outlook, we believe our commitment to develop new products and services, including our very successful new product expansion, beyond our traditional FAA approved engine parts into other aircraft controls and accessory parts, our strong financial position and our ability to identify select acquisition opportunities at favorable prices provide the foundation for continued growth in sales and earnings.

We continue to believe that the commercial aviation industry, because of the global scope of most of our customers, offers some of the greatest growth potential of any industry despite current U.S. economic conditions -- and I'm going to comment a little more in a minute. Furthermore we believe the previously mentioned $300 million amended revolving credit facility provides additional flexibility for our capital needs and may allow us to pursue more acquisition opportunities in the future.

Based upon current market conditions we are targeting fiscal '08 net sales and operating income growth over fiscal '07 to approximate 13% and 21% respectively and diluted net income per share within a range of $1.75 to $1.78. These targets exclude the impact of additional acquisitions, if any. We continue to target fiscal '08 cash flow from operating activities to approximate $70 million and our CapEx for '08 should be in the area range of $16 million to $18 million.

I'd like to also comment on questions that have been raised recently to management and be very open about the outlook. We are us very confident that our earnings and revenue projections for the current year will in fact be met. We have spoken to our airline customers and even though there -- some airlines have indicated they are going to take certain aircraft out of service, we have anticipated a lot of this in our planning.

Our people in the Flight Support Group, if I say so myself, are very, very good at planning. They stay in close contact with their customers. They know what their customers are expecting to do and we build that into our forecast. So when certain airlines, one of which was American that hit the press recently, announced that it was going to take a number of aircraft out of service, we had already anticipated most of this so it didn't come as a shock to us.

On the positive side I can tell you that in times of duress, financial stress and duress, a lot of airlines realize that alternative parts are the only opportunity that they can save money in cost reduction. And by that I mean the three largest costs to an airline used to be labor, fuel and repair and overhaul. In today's world it's fuel, number one, as you all know, labor cost and then repair and overhaul.

They cannot effectively control because of the first two, fuel and labor. The only cost saving opportunity is in parts and repair and overhaul. And since we guess 70 to 75% of overhaul is in parts, the largest cost saving opportunity is in the parts area. Some airlines save many, many millions of dollars, some airlines over $30 million a year purchasing our parts. And I can tell you that the level of activity, and I just got off the phone with the head of our Flight Support Group, Parts Group, and he has told me that the flurry of activity that he has realized in the past couple of weeks and few months actually has never been surpassed in our history. So he has meetings, conferences and so forth to discuss alternatives parts.

The airlines, we believe, have built religion and they understand where their cost savings can come from. And airlines that we have never done business with have been contacting us to come out, talk to them and so forth. So we are very confident that "HEICO is not going to fall apart because a couple of airlines decided to take some planes out". Quite the contrary. We are very sanguine, very confident that our strategy is going to prevail and we'll probably get stronger in these times.

And what that means is once we get a foothold in times that they're reducing fleet, once they start to add to fleet it gets even stronger. So we think our medium-term and longer-term outlook is excellent; we think our short-term outlook is pretty much what we say it is and we have total confidence in the guidance and predictions that we are making.

So that -- in closing, we will continue to adhere to our long-term strategy of developing and marketing new products and services which provides our existing customers with improved technology, substantial cost savings and allows us to expand our markets and we will do that. We believe that this strategy has resulted in the strong financial performance that we have reported since 1990, that's 18 years that this management has run the Company, and it also positions us with the opportunity for ongoing substantial forward growth and we're very confident of the future.

That is the extent of my prepared remarks and I would like to open the floor for any questions which you may have.

(OPERATOR INSTRUCTIONS). Tyler Hojo, Sidoti Company.

Good morning, everyone. I have a question, Larry. Especially in light of some of your closing comments there. If I look at the guidance and specifically I look at the low end of the revenue and operating income guidance, it's actually a little bit below where you guys indicated in the first quarter. And I'm just wondering, is that conservatism here or is that some of the -- maybe some near-term issues that you're just looking to be a little bit more conservative than you were in the first quarter. Maybe just your comment there on that specific point.

Tyler, I'm going to hand that over to Tom, but I don't think that our net income or EPS is below at all; I think we're increasing it. And we feel more confident than ever on the bottom line. As you know, we're a bottom line oriented company. So if we reduce our revenue estimates by 1% -- we manage from the bottom line. So we go to -- the top line is what it is. But I think the top line may be a little bit less, but the bottom line is actually more. And we look at cash flow and bottom line.

And I don't mean to be Cavalier, because you can't disregard the top line of course, but we look to bring in profits bottom line growth because that's what sticks to us. If we wanted to be a growth company we could go out and make acquisitions that have 10%, 5% margins and Wall Street would say wow, wow, wow, look at their top-line growth, boom, boom, boom -- and we could play those games, but we don't care about that. But I'm going to hand the rest of that over to Tom.

Tyler, I think really, as Larry already said, we narrowed a bit our net sales guidance. We were previously forecasting what equivalent -- related to about a 14% revenue growth at 13%, if you do the math you're around 575, so that's on the low-end, $3 million to $5 million of revenue lowering principally in the ETG group and principally related to some deferrals and longer lead times in introducing and bringing to market some new products and Victor can speak to the specifics of that.

But as Larry mentioned on the operating income, previously I think we were forecasting around a 20% growth over '07 and we commented again -- raising that slightly to 21%. And again as Larry mentioned, the EPS -- if you take the midpoint of the EPS guidance first quarter versus second quarter, we actually raised the targeted growth around 1% to 22%. So yes, a little bit lowering on the sales, but again, strong -- actually stronger margins than we originally indicated and, again, overall increase in EPS targets.

I would love to hear Victor's comments just in terms of what's getting deferred because it looked like -- just to me it looked like ETG had a terrific quarter. And I guess did something get pulled forward or what happened there just in terms of that segment?

No, I think what we're talking about is what we're expecting in the second half of the year. We had some product development in the homeland security area that we expected to have pretty good take up in the second half of the year and what happened was that development took longer, was harder. I think we're mostly through it now, but it means for the most part a revenue deferral.

And so that's the bulk of it. I think there's a little bit of delayed activity, slower, if you will, in some of the medical products. And we're expecting a little bit of deferral there. I must say, I can't rule out that it will still come in where we had originally expected, but I'd rather not be out there telling everyone to expect it and then it doesn't come. I feel much more comfortable with this position.

That's fine. And just -- I guess one last line. Just in terms of a couple weeks ago Lufthansa and Qantas announced a pact and I'm just kind of wondering what your positioning is in Qantas currently and what that means to you guys?

As a general comment I've said many times that HEICO is kind of a boring stock to own and I'm going repeat that again. It's boring because it grows like grass and nothing happens instantaneously. So unlike -- and some of you have heard me say this -- unlike Apple or a company like that where they introduce the iPod and earnings go screeching up and the stock is great. None of that stock, as you know because you know the Company very well, none of that stuff is going to happen in HEICO. Whatever happens at a glacial pace. It's like a big snowball rolling down the hill, it goes.

So we are optimistic that in the future that the relationship that Qantas has struck with Lufthansa is going to be a win-win for both companies. We know that Lufthansa is very, very committed, we all know that, to alternative parts. But they save a lot of money and it's a key strategy for them. We think that it's very likely that they're going to pass some of that on to their 50-50 partner down in Melbourne, Australia in the engine shop with Qantas.

But is this going to happen right away? I don't think so. But it's another -- what I call another feather in our cap. It's another little clump of snow on the snowball. And it can only benefit us in the future. So I would think if you -- you ask me this question three or four years from now, I'm optimistic that I'll be able to say, yes, that was really a good thing that happened and we're going to get more content in Qantas.

Same kind of thing if -- when Lufthansa takes positions in companies such as it did in JetBlue and a similar kind of thing. And everything is glacial in HEICO and I wouldn't expect to see Qantas right away. But I'm very optimistic and I have reason to believe, based on experience, that two, three, four years that snowball is going to get better.

Great. Thanks for that.

Chris Donaghey, SunTrust Robinson.

Thanks for taking the call. Larry, first of all, speaking of the relatively slow pace at which things ramp, can give just kind of give us an update on where British Airways is and the type of traction you're seeing there, number one? And then number two, have you already begun discussions with Delta as they now start to work towards integrating the northwest fleet?

Again, British Airways is a customer, we announced that, we have this relationship with them which is excellent and getting better. Exactly what their sales is at this time I don't know, but I feel, again, very confident in the snowball theory that it just gets bigger and bigger. And what you're doing is I think all the shareholders of HEICO are seeing increased revenue and profit based upon the snowball theory.

And British Airways is just one element of it. It's a wonderful customer, wonderful client and I know our relationships are getting stronger there. And it's a pleasure to deal with them and they're giving us greater opportunities and we're taking them and I think it's a win, win.

As far as Delta and Northwest, again, snowball theory. Delta said that if the deal goes through, which I'm hoping it will and I think it will, that they will be doing more MRO for the Northwest fleet. We have a great relationship with Delta, they're a wonderful carrier, they do a great job in their MRO and, again, snowball theory.

I'm optimistic that we're going to see additional business. We're not going to see it in the first quarter. It's going to grow just like that snowball and that's the theory of HEICO. So I'm very optimistic on both of those counts and if there are any other consolidations I think if United buys -- of course they announced that their deal with U.S. might be off, but you never know. But any of these major carriers acquiring or merging I'm very optimist. Those should be pluses for us.

Okay, great. And I apologized if I missed this. But Tom, you were talking about the slight lowering of the revenue guidance. Did you break that out or did you kind of at least qualify it between the segments, Flight Support versus Electronic Technologies?

No, we didn't. But at this point we don't contemplate any significant change in terms of the mix between the two. It's been running roughly 75/25% for the last probably couple years and quarters and plus or minus a percent or two it would stay within that range at this point.

Okay, great, thanks. And then last thing, Larry. The press release highlighted this, the press release earlier this week announcing the credit facility expansion and you talked about it this morning on the call as well. With that more than doubling do you already have an acquisition or two in mind and should we expect that the size of the acquisition, especially given the capacity increase on the credit facility, that the size of your acquisition targets is going to be increasing?

I don't think you can make that absolute assumption. The answer is we have nothing that we've specifically allocated the funds for and we're continuing to look. We think that the acquisition opportunities, because of the problems in the credit markets, the leveraged buyouts, there's not as much capital there. We think that there might be more opportunities for us being a strategic buyer. We wanted to have the funds available in the event that we had a very, very good opportunity and we got very good pricings from our thanks and we thought this was an opportune moment.

We had to renew the facility anyway and rather than just renew it as it was the banks had come to us with a very good proposition because of our high credit standing. And banks are looking for good credits and fortunately we fit that bill. And we decided this would be a good opportunity because if the right acquisition came along we would be in a position to stand tall and be able to deal with that acquisition with strength. So that was the reason for doing it and also the pricing is good financially. It's a very good thing for us.

Okay, great. And just as a quick follow-up to that -- if there is a potential for a larger acquisition would you expect that to be a Flight Support Group type of acquisition or an Electronic Technologies Group type of acquisition? Just how are you looking at the mix of acquisition activity in the two segments (multiple speakers)?

The answer is, yes. It will be in one of the two. As you know, we're an opportunistic acquirer. If we have an opportunity in one segment or the other at the right price and the right company and the right management we're going to go for it. We have the capital to do it and we have the expertise. So wherever it comes we're happy to do it in either segment. We really have no specific preference. If it meets our standards and it's opportunistic we will do it in either segment.

Okay, great. Thanks again, Larry.

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

Larry, I think in the past you guys have shown a graph, and this is quite a while ago, that showed the JT8D portion of the catalog it declined pretty dramatically and I think that's probably the phone call you're getting a lot of since this American announcement.

Can you give us -- for competitive reasons obviously you don't want to give us the amount of catalog in each engine category and the importance of each platform, but can you sort of anecdotally tell us what JT8D means to HEICO now versus say five or seven years ago?

Well, as you know, it's enormously -- greatly is not enough, but enormously reduced. It's a small percentage. But let me give that -- Eric can give you a little more color on that so I'm going to ask him.

Historically what we've broken out is the parts which are applicable to the JT8D standard engine which powers the older 727 -- well, the older 737's, all of the 727's and all of the DC9's. And parts applicable to those engines only account for less them 2% of our parts ready, so it's extremely small.

Then we've got another group of parts which are eligible for the JT8D 200 which powers the MD80s and I can tell you that that is a significantly shrinking portion of our business. JT8D 15 years ago used to be virtually 100% of our business and now it's down considerably and it's no longer our -- anywhere close to a top platform.

Okay. And then if I think of the way HEICO grows through the capacity changes or catalog expansion, increased PMA penetration and pricing, those four different things, I mean what do you think is the most important driver for growth at Flight Support Group?

There's no question it's the volume, the number of new parts, SKUs that we had to it. We get a little bit of pricing. But pricing is not our focus. We are more interested in adding new product and that's where the growth is coming from. It's historically been that way and we foresee that in the future.

Okay. And then Victor, you guys mentioned some push out on some projects and the margins of course in Electronic Technologies this quarter were very strong. Does that imply that we may see a little weakness in the second half relative to this very strong quarter in Electronic Technologies?

I think that the second quarter -- excuse me, the second half could -- it's possible that it won't be as strong as the first half. I think we've got to wait until we get a little further out. But it's a possibility.

Okay. And then I guess for Eric, by the same token, the first half of Flight Support Group was pretty strong relative to Q4 of last year. Are we sort of at a new level? We keep mentioning product mix is great every quarter. Is there a reason that product mix wouldn't be great in the second half?

No, I would say we would expect the trend to continue. We're expecting -- Tom has announced our guidance. I think our numbers are excellent. It's important to point out, while HEICO does have limited price increases, we do put through some price increases, the majority of our revenue and earnings is driven by the development of new products. We try to remain very customer friendly.

And if you look at our internal growth, it's basically unit volume and new part increases as opposed to other manufacturers where a large percentage, if not all, comes from price increases. So our business continues to grow and I expect continued growth with what Tom said in the second half.

And with the pressures the FAA has been facing recently, is that a barrier, do you think, to getting that 400 new PMAs, or is there no change really there?

I would say there's no change. Our relationship with the FAA is outstanding and we're not seeing any holdup whatsoever in approval of our parts. As a matter-of-fact, they think philosophically the FAA understands that the airlines are under cost pressures. And when they buy HEICO parts they're able to put in new metal at a much reduced price and that improves safety and reliability and that's what he FAA wants. So we're not seeing any problems there whatsoever.

And then lastly, Larry, one of the features in the new line of credit I think is that Euro feature. Is there a philosophy change there in terms of geographic mix maybe of acquisition potential?

No, not really. I mean, we do look at companies that are outside the U.S. and we wanted to have that flexibility and we thought that since this was a bigger facility that the banks offered that facility and we thought it would be wise just in case.

Great, thanks for your time. Congratulations on the quarter.

Thank you very much.

Chris Quilty, Raymond James & Associates.

Good morning, gentlemen. A question I think probably directed at Eric and it's a question on -- you had mentioned the high level of activity for PMA requests. And just in general, I mean, I was always under the assumption that the vast majority of your customers would use your parts to the maximum extent possible already. Is that not true or are you seeing new customers coming in seeking out parts?

Let me comment and then turn it over to Eric. The answer is that when people are not under pressures they very often don't do things as aggressively as they do when they're under pressure. So they approve -- airlines have different rules, different airlines have different rules and systems for approving parts -- some do it very quickly and efficiently, some do it slowly. It depends on their personnel, it depends on the focus of management pushing them to save cost and do different things and so each airline is difference.

However, when they come under pressure and duress and the threat of shutting down and difficulties they start to beat the bushes and there's a major push. So this push is what I was commenting about earlier. And we're very, very definitely seeing it. We're seeing interest from airlines that never expressed interest before. So that's all very positive.

And we noticed that when times get tough this always happens and when they level out and people get fat and happy there's less pressure. But the benefits of the tough times, in terms of what they buy from us, continues into the better times. But I'll let -- Eric can comment deeper on that, Chris.

Chris, the two areas that we're seen tremendous growth in is existing customers wanting to buy new products and coming to us with new products saying hey, you developed all this other stuff for me, can you develop this new list of products, number one. Number two is we are continually adding customers and, of course, they buy our existing parts as well as ask us to develop new parts.

Typically when we get a customer they buy all of their requirements from us that we can supply. So once they approve our parts there's no reason to only buy say 75% of their demand from us. They'll just buy typically 100% of their demand.

Okay. So do you have customers who currently are only buying 10% of what they could buy from you?

Yes, we do. And as my dad mentioned, that is the economic difficulties give them greater incentive to get on that and hurry up and get these parts approved because their management and leadership starts asking about it. So, yes, I think that there is a very large potential. If HEICO never developed another part and we never added another customer, there is a huge amount of sales that we could generate from our existing customers from parts that they are not currently buying. And that's why we say that in economic -- times of economic hardship they get more serious and we build market share very aggressively.

And if you were to hazard a guess across all of your customers, would you guess that 10% or 50% are 80% penetration amongst the airlines, who are already HEICO customers, of what they're using?

Yes, it's a difficult -- as you can imagine, it's difficult to get all of that information from the customers and it's difficult to analyze it because of anomalies in the data. But I would say that we could maybe we're out with the existing products, with the existing customers, maybe at 50% penetration just so you can get an idea of the magnitude, it's huge.

I mean, what I call the unsold potential is just enormous and that doesn't include developing any additional parts. And we're going to develop -- this year should be around 500 parts. And it is just a tremendous opportunity for us. And these folks need the time to be able to focus on it and I think we're going to do very well as they focus on it.

Great. And one final question just in terms of a breakdown domestic versus international issue here. It seems like most of the capacity cuts that have been announced have been domestic, but I think Qantas the other day announced 5%. Do you expect to see international carriers cutting capacity or do you think most of the cut capacity from the U.S. is going to end up getting shifted into the international markets?

I think that while, of course, oil is nominated in dollars and U.S. carriers are feeling the greater pain, of course the U.S. economic condition and price in dollars has gone up more than say in Euros, the foreign carriers are starting to feel the pain. We have very well entrenched positions with the financially strong foreign carriers. So I think that as some of these newer less financially stable airlines get squeezed and have to reduce some of the very elastic leisure travel that they've got that it's going to benefit our larger established customers.

So yes, while there may be some fleet reductions with the number of new products we're coming out with, the amounts of increased penetration that we can get, some of the less financially stable noncustomers getting squeezed and our major customers picking it up, as I said, and I think we're just going to continue to build market share.

Great.

And if you look historically, what's happened after 2001 HEICO's market share and reputation around the world has grown tremendously. And after SARS the same thing. And of course, nobody is anticipating anything like that. However, as they do get under a little bit of financial pressure they've got to look to this and HEICO is a fully accepted alternative around the world.

Chris, just a little further color on it. For many years we have looked at the airline situation in the United States differently than we look at it particularly in Europe and also in the Far East. In India you have a situation similar to what you have in the United States where you have all these little startup airlines and they're running into some problems.

But in Europe you don't have the same competitive situation and desire to take market share. The strategy of taking market share that has been driving U.S. carriers for so many years which, to me -- well, you can read my mind what I might think of that because we don't try to take market share in that sense.

But I think that the U.S. carriers are feeling the pressure for that reason and because, as Eric pointed out, the cost of fuel in dollars has gone way up whereas the cost of fuel to somebody in the Euromarket dealing in Euros I understand has actually decreased because of the Euro/dollar relationship.

Now maybe that will swing around a little bit as the dollar gets stronger, but to this point we have felt -- the U.S. carriers have felt a lot more pain because of those two issues and I think that's why you're seeing consolidation. I don't know what you'll see on the fuel side, but certainly if the dollar gets stronger it probably will help the airlines. Clearly I think it will help the U.S. carriers.

But again, over half of our business today, as you know, is non U.S. So I think we've diversified our business through Electronic Technologies. We've diversified our business because we're U.S. and we're in foreign markets. So all of this, when you put it altogether as it impacts HEICO, again, I don't think we're going to see any major negative impact to HEICO whichever way we slice it.

Great, thanks a lot, guys.

Thank you, Chris.

James Foung, Gabelli & Co.

Good morning, Larry, everyone else. I've just got some kind of loose questions there tied into your thought. In the quarter you had 12% base growth in Flight Support. Was that all new products that drove that organic growth?

I don't think it is new products 100%, but I think the majority is, but some of it is repair and overhaul and a little bit might have been pricing.

Yes, I would say the minority would be pricing and the vast majority would be a combination of increased sales volume on existing products and the sale of new products.

Okay. And then I guess, Eric, when you do the new programs with the airlines, how long -- when you enter into an agreement with -- to do a PMA part for them, how long does it take for you to get that part into your revenue numbers from the inception I guess to production?

The typical part would probably be, from the time we identify it until we have it available for sale and stocked on our shelves, would typically be about one year. Now that can be as short as three months or it can be as long as two years, but let's just call it, for simplicity, say about a year and I would say the majority are in that category. Then once we offer it for sale, over the next say two years is when we built say two-thirds of our marketshare and then perhaps in the third and fourth year, then we will build another third of the marketshare.

Again, our strategy though is not to sell every part to every customer. Our strategy -- we size our production capacity as a certain percentage of the market. We leave the OEM with a vast majority of the marketshare. We will only take a third worldwide marketshare. We'll leave the OEM with two-thirds marketshare and this way, it doesn't make a very large financial impact to the OEM.

If you look at an OEM business model the way that they maximize profit and the right thing to do for the OEM is to put through aggressive price increases so they are able to mask any loss in unit volume through price increases on the volume that they maintain and that really is our strategy is to leave them with the majority, let them price it however they want. We take our little minority. We are very fair to our customers with pricing. We don't try to sell everything to everybody and it has worked very well.

By doing so, you kind of keep them off your back essentially then right?

That is correct. That is correct. If they want to get on our back and if they want to get in a fight with us, then we can be very, very aggressive and it will be very damaging to them, but that is not our approach. That is not our strategy and that is why, as I mentioned before in Chris' question why have such a big unsold product potential out there because we don't try to sell everything to everybody and we just sell them really what appeals to the particular buyers and engineers and generally folks with whom we are working and we work with them very easily.

So this 400 new parts that you're developing this year, you already have an idea what the revenue generation would be in 2009 then right?

That is correct, yes.

Do you care to give us a clue what that might be?

No, again, for competitive reasons, we don't break that out, but I can tell you all of the earnings and revenue numbers that Tom has given out is substantiated by what we are developing internally. Our pipeline in terms of number of parts and potential revenue continues to grow every single year. So I think you can take great comfort in that. It is not shrinking at all. It is continuing to build and grow both as a percentage of existing sales and in terms of numbers of parts and dollars, dollar potential.

Who are your five top customers?

We don't disclose who the top customers are, but I can tell you our partners that we speak very vocally about who have committed to buying most if not all of our existing future products include Lufthansa, American, United, Delta, JAL, British Airways and we are in talks with other folks as well.

Jim, just in general -- the bigger the airline the bigger the customer. The value proposition is greater when you have more engines, more airplanes. So we're important -- the bigger you are the more important we are to you.

In your prepared text, Larry, you talk about them generating 20% of your sales roughly. Are you worried about any of those five customers as you look out the next couple years in terms of their financial health?

No, no, we're not worried. I think most of them are really very strong financially. So, no.

Okay.

The other thing is that there's a macroeconomic assumption that I fly under and we all do at HEICO is that there are going to be airplanes. And if there are going to be airplanes flying, we don't see how international commerce will continue or even domestic commerce or European without aircraft. And if you buy into that macroeconomic assumption then you know that we're going to have a lot of airplanes and somebody is going to be flying those airplanes and, in order to fly them efficiently. If you have a big fleet you've got to look for ways to save money and we are the biggest value proposition on the planet.

So it's really only a question of time and history has borne that out. And when there have been companies that have gone into Chapter 11 and some may come out of Chapter 11 or merge or whatever, we have continued to grow, same way. So we make that assumption that that will continue. And I think it's a very valid --

And if you see what's going on, U.S.-based companies are deriving larger percentages of their sales internationally. The only way you can build market share is you've got to be there with the customer. 15 years ago people thought there would be a lot of teleconferencing and that would erode the need to be there. Quite the contrary you need to be there and see the other person across the table and develop a relationship.

So as far as business travel goes we anticipate that that's just going to continue to increase. Also in terms of leisure travel, as other countries get developed and the United States faces greater competition there's more interest in other countries around the world and what's going on. And Americans want to go, rightfully so, and visit, and see what's happening. So we think we're in the right macroeconomic field.

Jim, I'd like to make a comment because I know that you guys are long-term players. We've spoken at length about how you invest and Gabelli and how he invests and a number of other people who are on this call are the same long-term players. And HEICO, as you know, is a long-term kind of investment. I've said it a number of times on this call, that it's like watching grass grow or a snowball, and we focus on the macro picture, not from quarter to quarter what they happen.

But in the long-term we feel very confident that -- the medium-term that this is just something that will continue, same strategies, doing the same thing, not taking crazy chances and that snowball is going to keep going down the hill. So we think we're on to a strategy that works. And again, we don't want to put GE or Pratt or anybody out of business, we want to take our market share, make a good return far our shareholders, keep growing, keep getting strong cash flow, strong bottom line, good returns. We think that the macro picture is what we focus on.

Sounds like a great strategy. I guess just one last question, just kind of a more detailed question on corporate expense. You mentioned that you guys have been lowering corporate expense as you reduce the regulatory compliance cost. Could you tell me what the swing is this year in '08 from last year, what the lower compliance cost would be?

Jim, this is Tom Irwin. As we mentioned earlier in -- really beginning in '05 and '06 our compliance costs, generally referred to as Sarbanes-Oxley compliance cost, audit, internal audit, things like that complying with those SEC and [PTOB] rules and New York Stock Exchange rules began to grow and bloomed, if you will, in '06 and beginning in '07 and we really set a focus in '08 to bring those costs down. And largely what you're seeing in the corporate expense line is specifically the compliance costs associated with internal audits and things like that.

So this year compared to last year how much will you be reducing the compliance costs? What would it look like in '09?

Well, I'm not sure we're comfortable giving those targets out. What we did say was that -- we commented before that last year we targeted a reduction of $1 million in '07 and we did reach it. That was principally internal costs. And we didn't disclose a specific target, we do have it internally but we haven't made reference to it. Something in that magnitude but -- it's reasonable but, again, we didn't announce a specific target.

Okay. So we could see a little more lowering of the costs and everything by the end of this year?

Yes, I think overall we've commented that we were targeting to bring corporate expense below 3% is what it kind of bloomed at -- a little over 3 and a fraction. And now we're running below that 3%. So us we expect that that's a reasonable target in the near-term.

Jim, I think some of this was -- I don't want to give the wrong impression that we were being inefficient in the past in the way we control these costs. They changed the rules and the auditors and the government, they passed -- Tom knows what the technical term was, but some new rule that eliminated the need for a lot of the stuff that we were doing that we were required to do before. So they've reduced that and that's helped us and we've streamlined the process to comply with the revised regulations. So that's what I think has happened.

Yes, basically both the Exchange, New York Stock Exchange and the SEC and the PTOB, all those governing parties recognize that in effect there was a pendulum that swung too far in terms of over compliance and over regulation and over auditing, if you will, and introduced PTOB, and in particular introduced last year some new audit guidance that the external auditors and the internal auditors can now comply with relative -- basically getting to more of an integrated approach to it as opposed to internal controls and financial audits being totally separate and separate reports, etc., etc. So that's the kind of efficiency in the rules that we are taking [advantage] of as a Company to lower our compliance costs.

Good. Okay, great. Thanks a lot. Good quarter.

Thank you, Jim.

Arnie Ursaner, CJS Securities.

Good morning. First thing is an observation. I think it's pretty funny having a Florida-based company who looked great on the TV the other day in Florida focus on the snowball theory. First I have a clarification question for Tom, if I can. You indicated in your prepared remarks we expect comparable consolidated operating margins for the full fiscal year. Are you implying comparable to Q2 or comparable to the six-month?

Well, I would say comparable to both really. If you take -- there's a range there of -- it was 17.8 and 18.3 or something like that and if you average them I'd say by quarter we should stay within that range. And for the full year you can impute from our operating income guidance of roughly a 21% growth on the revenue guidance would be a comparable consolidated operating income margin with first half of the year.

Okay. Second question, I know you mentioned in your comments that you are getting some price relief. I know raw materials themselves are not a critical cost component for you, but I'm sure you are absorbing some heftier price increases that are normal for you. I'm assuming you're able to pass those on through price relief or is that not true?

Arnie, this is Eric. We are getting some price improvements to be able to pass some of those costs on. So I would say overall we're doing pretty nicely in that area.

How much of a lead time do you need to give customers?

For what?

For a price increase.

Again, most of our revenue is contractually committed over a long-term. So each of those contracts is different according to what the customer was really looking for. So I would say that depends anywhere from 30 days on up to some contracts may have pricing resets annually.

Okay. My other questions relate to your debt. And if you could just remind us of the rate versus -- I assume it's versus LIBOR?

We are -- yes, we're tied to a LIBOR.

And what is the rate versus LIBOR?

The old one or the new one?

The new one.

The new one is a spread over LIBOR, as you pointed out, and it begins -- depending on the leverage ratio it begins at around LIBOR plus 5 days. Our old rate began at LIBOR plus three-quarters. So we picked up an eighth. And then the spreads increased obviously based on the leverage ration. But based on our current leverage ratio it would be the five-eighths spread over LIBOR.

And Arnie, just a technicality -- this is an unsecured facility. The old facility was a secured facility.

Okay, that was one of my questions. There are no covenant issues regarding acquisitions or other things that would inhibit you?

The answer is there are covenants, but they're the typical financial leverage ratio covenants, things like that, and certain baskets typical for this kind of transaction. But in evaluating the overall covenants we don't believe that we should be limited in anything that we would reasonably expect to do in the next five years. Our business strategy and the terms of the agreement match at this point.

Okay. And to build our models what is the carrying cost for the debt even if you don't use it? How many basis points are you incurring to carry it?

Well, it's pretty small. I mean, you're talking about spreads that begin again typically at 12.5 basis points on unused and go up. So that's a little bit lower as well from the original one. We'll actually be, for your benefit, we expect to file in 8-K either today or tomorrow that under the SEC rules has the full agreement and fall terms and conditions so there will be full closure of it.

Okay. And my final question again relates to the size of the debt you're taking on. Obviously it creates tremendous flexibility. To be clear, Larry, are you -- I know you're an opportunistic buyer, but are you thinking larger companies or are you thinking more smaller companies? Quantity of deals or are you in fact looking at more sizable deals?

Arnie, to tell you the truth, both, because we'll look at both, but they have to meet our guidelines. And we didn't put -- I said earlier, we didn't put this on for a specific transaction that we had and all this is what we want to use it for. There are some deals out there that we look at from time to time that if we had a better facility we could go after some of those things.

And because the markets have changed a little bit -- pricing, as you know, M&A pricing is down. There were some articles I read recently that probably one less EBITDA turn and stuff like that. So we wanted to be prepared, but don't expect some announcement tomorrow morning that we just bought some giant company. It could happen, but certainly at this moment I have no knowledge of any such thing.

We just want to be prepared as we run the Company in the best possible way we can. I think you know us well enough, you've been following the Company, we are a company that does a lot of planning. We think about where we're going and we set up longer-term objectives and this is one of them in the financial area and we thought this was a good time to put on larger debt just in case.

So it could be in -- one of the questions that somebody asked earlier was is this going to be Flight Support, Electronic Technologies, wherever the opportunistic possibility is that's where it will be. It could be a big company, it could be a number of small companies. Wherever we get the bang for the buck that's what we're going to do.

But Arnie, I can tell you we're very, as you know, very disciplined buyers. And just because we have a large line of credit doesn't mean we're going to go out and vary from our historical strategy. We still have all the metrics that we look at and earnings accretion is what's important to this company, not size. So we're not going to go out and just go spend the money to get big, but instead have it there to be able to take advantage of the opportunities.

My final question. I know you've always had pretty good discipline with your customers to make sure you get paid given the, again, current uncertainty. Have you changed your -- without mentioning specific customers, have you changed your collection patterns with any of your customers?

Not at all, not at all. We watch them very carefully. We insist upon payment on time and so forth and we watch the total credit exposure in all divisions of the Company. We consolidate a customer's exposure and we look at it, not just by division, but across the whole number of companies that we have. So I think we're on top of that pretty carefully. We set credit limits and we're pretty tight with that.

Okay, thank you very much.

David Gremmels, Catapult Capital.

Good morning. Just one quick question on your historical experience with the cycle. You talked about the more challenging environment for airlines perhaps actually stimulating growth and I'm just curious what you experienced in the last industry downturn. Or is the PMA opportunity new enough that the last downturn isn't a meaningful reference point?

Well, I think we said exactly what we experienced. We experienced -- when times get tough -- Eric mentioned in 911 after SARS and all that other stuff, whenever there's a crisis we generally see more interest in our products. So we've would assume that the same thing will be true. And as a matter-of-fact, we know it's true. We know it's true because the level of interest has significantly picked up.

And of course, with 911 and SARS, those were large outside events that caused precipitous decline. Nobody is anticipating anything close to that. Instead obviously unit volumes will come under a little bit of pressure, but that's being offset by all the increased interest in our products and buying the existing products that haven't been sold.

Got it. Very good, thank you. That's helpful, appreciate it.

We have no further questions.

Well, I want to thank you all for your interest in HEICO. And if you do have any questions or comments and you want to call Tom, Eric, Victor or myself you're all welcome to. And we wish you a pleasant summer and I guess the next call will be the third quarter sometime in I guess late August. So take care of yourselves and we'll speak to you then. Bye-bye.