HEICO Corp (HEI) 2008 Q3 法說會逐字稿

Good morning and welcome to be HEICO Corporation's fiscal 2008 third quarter and earnings conference call. During this call there will be breaks for questions. (Operator Instructions)

I will now turn the call over to Laurans Mendelson, Chairman, President, and CEO of HEICO Corporation.

Thank you and good morning to everyone on this conference call for third quarter. We are here just before the Labor Day break, and we think we have relatively good news for all the HEICO interested people out in the audience.

I'm Larry Mendelson. I am the CEO of HEICO, and I am joined here this morning by Eric Mendelson, who is President of the 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 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 government contracts; governmental and regulatory demands; export policies and restrictions; reductions in defense, space, or homeland security spending by US and our 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; and economic conditions within and outside of the aviation, defense, space, and electronics industries, which could negatively impact our costs and revenues; and HEICO's ability to maintain effective internal controls which could adversely affect our business and the market price of our common stock.

Parties 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, filing 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. Before reviewing our third-quarter operating results in detail, I would like to take a few moments to summarize the highlights of our record-setting quarter.

Both Flight Support and Electronic Technologies reported record sales and earnings in the third quarter of fiscal '08, combining for an overall 11% improvement in consolidated sales and a 15% increase in consolidated operating income over the third quarter of last year. Our consolidated third-quarter and year-to-date net sales, operating income, and net income represent all-time record quarterly as well as nine-month results for HEICO.

Consolidated operating margins improved to 18.7% in the third quarter of '08, up from 18% in the third quarter of last year. The higher sales contributed to an 18% increase in consolidated net income over the prior year's third quarter.

In July 2008, we paid our 60th consecutive semi-annual cash dividend since 1979.

In July of 2008, HEICO was listed among the 15 US industrial companies included in Standard & Poor's annual, quote, Global Challengers, unquote, which is a list of midsize companies that show the highest growth characteristics. We are particularly proud of that designation.

Recently, Boeing announced that our Flight Support Group's distribution business, Seal Dynamics, has signed an agreement to be part of Boeing's Integrated Materials Management initiative, under which Boeing and its IMM suppliers -- that is, of course, Integrated Material Management suppliers -- maintain an airline's inventory of spare parts, providing items as needed.

We believe that each of these events provide further indication of the concentrated efforts for long-term, sustainable growth at HEICO.

Drilling down into the detail items that we have reported, overall consolidated net sales increased 11% to a record $147.3 million in the third quarter of '08, up from $133.2 million in the third quarter of '07, and increased 16% to a record $425.6 million in the first nine months of '08, up from $368.1 million in the prior year.

The record quarter and year-to-date sales figures reflect strong sales growth in both Flight Support and Electronic Technologies. Furthermore, the $58 million year-to-date increase in consolidated net sales is represented by approximately $38 million attributable to organic growth, representing growth at about 10%; and $20 million is attributable to acquisition.

Net sales of Flight Support increased to a record $110 million in the third quarter of '08, up from $100.5 million in the third quarter of '07. Flight Support's net sales in the first nine months of '08 increased to a record of $320.2 million, up from $281 million in the first nine months of the prior year.

The year-to-date increase reflects organic growth of approximately 10% as well as the impact on net sales from four bolt-on acquisitions completed since the third quarter of last year. The organic increase in Flight Support's revenues reflects our continued success in developing and bringing to market new products and services.

In the third quarter of fiscal '08, organic sales of Flight Support equaled approximately 5%, reflecting the capacity reductions widely reported within the airline industry as a result of rising fuel cost. I will comment later on these capacity reductions.

Net sales in Electronic Technologies increased to a record $37.7 million in the third quarter of '08, up from 32.7% in the third quarter of '07. Electronic Technologies' net sales in the first nine months of '08 increased to a record $105.7 million, up from $87.1 million in the first nine months of '07.

The year-to-date increase reflects organic growth of approximately 10%, as well as the impact on net sales from two prior-year acquisitions. The organic increase in Electronic Technologies' revenues reflects increased demand for certain product.

In the third quarter of fiscal '08, organic sales growth of Electronic Technologies approximated 4%, which is more in line with our longer-term growth expectations of mid to upper single-digit growth rates.

Net sales for the first nine months of '08 by market were composed of approximately 69% from commercial aviation; 16% from defense and space; and 15% from other markets including medical, telecommunications, and other electronics. This sales mix is the same as what we experienced for the full fiscal year 2007.

Taking a look at operating income, consolidated operating income in the third quarter of '08 increased 15% to a record $27.5 million, up from $23.9 million in the third quarter of the prior year. Consolidated operating income in the first nine months of '08 increased 24% to a record $77.1 million, up from $62.2 million in the first nine months of '07. This reflects stronger earnings growth in both of our business segments.

Operating income of Flight Support in the third quarter of '08 increased 15% to a record $20.4 million, up from $17.8 million in the third quarter of the prior year, and increased 19% in the first nine months of '08 to a record $59.7 million, up from $50.1 million in the first nine months of '07. This too reflected an increase in net sales and an increase in operating margins resulting principally from a more favorable product mix.

Operating income of Electronic Technologies in the third quarter of '08 increased 5% to a record $10.8 million, up from $10.2 million in the third quarter of '07. It increased 19% in the first nine months of '08 to a record $27.7 million, up from $23.4 million in the first nine months of '07. This reflects an increase in net sales and strong gross margins that are generally comparable to the same periods of the prior year.

Corporate expenses in the third quarter of '08 decreased to $3.7 million, down from $4.1 million in the third quarter of '07, and decreased to $10.4 million in the first nine months of '08, down from $11.3 million in the first nine months of '07, as we continued to focus on controlling general corporate expenses as well as lowering regulatory compliance costs.

Operating margins of Flight Support reflected a favorable product mix as margins improved to 18.5% for the third quarter of '08, up from 17.7% in the third quarter of '07, and increased to 18.6% for the first nine months of '08, up from 17.8% in the first nine months of '07.

As expected, operating margins of Electronic Technologies were strong at 28.6% for the third quarter of '08 and 26.2% for the first nine months of '08, versus 31.3% and 26.8% for the respective periods of '07, reflecting a less favorable product mix.

Our consolidated operating margins improved to 18.7% for the third quarter of '08, up from 18% in the third quarter of '07, and to 18.1% for the first nine months of '08, up from 16.9% in the first nine months of '07. This principally reflects increased gross profit margin.

We expect consolidated operating margins for the full fiscal '08 year to approximate those experienced in the first nine months of '08.

Diluted earnings per share increased by a strong 18% to $0.47 in the third quarter of '08, up from $0.40 in the third quarter of '07.

Depreciation and amortization increased to $4 million in the third quarter of '08, up from $3 million in the third quarter of '07. That increase is primarily due to increased amortization of acquired intangible assets as well as depreciation of acquired facilities and equipment relating to certain acquisitions which we have made.

Research and development expense, total, was $5.4 million in the third quarter of '08 versus $3.8 million in the third quarter of '07, an increase of $1.6 million. The addition of new FAA PMA approvals continues to be a critical strategy to support our medium- and long-term growth. We now have over 6,000 parts approved by the FAA, and we are targeting approximately 400 new PMA certifications in fiscal '08. We also have a number of new products under development in Electronic Technologies.

SG&A expenses as a percent of net sales in the third quarter of '08 were comparable to the respective period in the prior year at 17.9% versus 17.8% last year. The increase in SG&A expense to $26.4 million in the third quarter of '08, up slightly from $23.8 million in the third quarter of '07, and to $76 million for the first nine months of '08, up from $66.7 million in the first nine months of '07, is principally due to higher operating costs, primarily personnel-related, associated with growth in sales, and includes the impact of recent acquisitions. SG&A expenses for the first nine months of fiscal '08 declined as a percentage of net sales to 17.8%, down from 18.1% for the first nine months of the prior year.

Interest expense in the third quarter of '08 decreased to $444,000, down from $729,000 in the third quarter of '07. This reflects lower interest rates.

During the third quarter of '08, we made net payments of $13 million to reduce our revolving credit facility. Interest and other income in the third quarters and nine months were not significant, and won't bother to comment on them.

The Company's effective tax rate was 35.3% for the third quarter of '08 and 34.8% for the first nine months of '08, compared to 33.8% in the third quarter of '07 and 32.9% in the first nine months of '07. The 1.5% increase in the third-quarter effective tax rate is principally due to the expiration of the research credit under Section 41 of the Internal Revenue Code; and this expired as of December 31, 2007. As a result of the expiration, an income tax credit for qualified R&D activities occurring subsequent to this date is not reflected in the income tax expense for the third quarter of '08.

At this point, we don't know if that R&D credit will be reinstated. In the past, Congress has kind of at the last month reinstated it. And then of course if they do so by the fourth quarter, we will be able to be include it in our tax provision and pick up the benefit then.

The 1.9% increase in the year-to-date effective tax rate is also principally due to expiration of Section 41 which I just spoke about, as well as the benefit of an income tax credit for qualified research and development activities the Company recognized for the full fiscal '06 year during the first nine months of '07, upon the retroactive extension in fiscal '07 of these tax credits. That is the retroactive extension approved by Congress.

The aggregate tax credit net of expenses increased net income by approximately $500,000 or $0.02 per diluted share for the first nine months of '07.

The minority interest share of our consolidated income was $4.6 million in the third quarter of '08, $4.4 million in the third quarter of '07. The increase from the third quarter of '07 is principally due to higher earnings in Flight Support, of which Lufthansa has a 20% ownership interest, as well as higher earnings within certain subsidiaries of Electronic Technologies in which minority interest exists.

Moving on to the balance sheet and cash flow, our financial position remains extremely strong. Cash flow from operating activities for the first nine months of '08 totaled $56.6 million, up from $37.3 million in the first nine months of the prior year. This includes a very strong $21.4 million generated in the third quarter of '08.

Our working capital ratio strengthened further to 3.2 as of July 31 versus 2.5 on October 31, '07.

DSOs of accounts receivable equaled 48 days as of July 31, down from 54 days as of October 31, '07, primarily due to the timing of accrued rebates and credits issued customers as well as cash collections. We continue to closely monitor receivable collection efforts and to manage our credit exposure in light of financial challenges facing some of our customers.

The inventory turnover rate as of July 31 equaled 128 days compared to 117 in October 31, '07. Inventory levels of Flight Support have of necessity increased since October 31, '07, principally as a result of the higher number of new parts being developed; and these new parts must be stocked in inventory before we can sell them.

No one customer accounted for more than 10% of net sales and our top five customers represented approximately 20% of consolidated net sales in the third quarter of '08.

Long-term debt to capitalization decreased to 9% as of the third quarter of '08, down from 13% as of October 31, '07. This reflects net year-to-date payments of $11 million under our revolving credit facility. As you all know, our leverage ratio continues to remain extremely low.

CapEx in the first nine months of '08 were approximately $10 million.

Looking forward, and based upon current market conditions, we continue to target fiscal '08 net sales and operating income growth over fiscal '07 to approximate 13% and 21%, respectively, and diluted net income per share within the range of $1.75 to $1.78.

These targets reflect the expected impact of capacity reductions announced by certain of our airline customers, but exclude the impact of any additional acquisitions should they occur. We would assume that those impacts would be positive, if they were to occur.

We are increasing our target for fiscal '08 cash flow from operating activities to approximately $73 million to $75 million, an increase from our previous estimate of $70 million. Our capital expenditures for fiscal '08 should approximate $14 million to $16 million.

We believe that commitment to develop new products and services, our strong financial position, as well as our ability to identify select acquisition opportunities provide the foundation for continued growth in sales and earnings.

As I have mentioned many times before, we believe our focus on continuing new product development is fundamental to our growth strategy. This strategy not only provides our existing customers with improved technology and substantial cost savings, it also allows us to expand our markets. This growth strategy has proven to be very, very effective over the years.

Although it appears possible that 2009 global air traffic may soften, our focus on expanding the number of products and services offered to customers will provide opportunity to grow sales and earnings in fiscal '09. As we cannot influence airline customers on their decisions regarding capacity increases and decreases, our strategy is to focus our efforts on those things over which we do have control.

For example, we are working diligently to increase the number of new PMA certifications over the next year from the current rate of about 400 to a target of about 500; and this is a 25% increase.

Number two, we are actively pursuing ways to speed up approvals of new products by our customers, to accelerate our market penetration rates. And we are pursuing new markets for existing products, including sales of PMA-equivalent parts to additional operators of aircraft worldwide. We continue to significantly increase development of FAA-approved PMA parts and continue to witness excellent market penetration by our comprehensive line of FAA-approved parts. HEICO is the largest independent supplier of both FAA-approved engines and non-engine PMA parts.

We expect to provide specific fiscal 2009 guidance at the time of our fourth-quarter earnings release scheduled normally for the latter part of December.

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

That is the extent of my formal prepared comments. I would like to open the floor for questions from our listeners. If the operator would start bringing the questions in, we are ready to answer.

(Operator Instructions) J.B. Groh, D.A. Davidson.

I wanted to, of course, focus in on a couple things. On Flight Support Group, it looked like -- my calculation -- organic growth was about 6%, which is down a little bit from the first half, which I guess isn't surprising. But conceptually, given the fact that you are going to ramp up your production and those sorts of things, do you think a double-digit rate is achievable even in the face of declining airline capacity next year? I know you are not giving guidance, but I am just looking for broad strokes.

J.B., the answer is this. We are going to try. We are in the process of, in the fourth quarter, doing our budgeting. The budgeting is a very complex process of trying to figure out what they bought before, how many planes are coming out of service, what they will be buying now as we add new parts to it. We really don't know what the answer is until we get finished with that budgeting process.

We don't expect to that the thing is going to fall off a cliff. We certainly don't expect anything like after 9/11, when we were probably 85% or 90% dependent on JT8D, one product. So we don't expect that type of thing at all.

The question we believe is how much we will grow, and we will be in a better position when we get our budgeting completed. But as a general comment, I know you know this, but I want to remind everybody that it is my goal as the CEO to grow this Company on a medium- to long-term basis of 20%. When I say 20%, I am really focused on net income.

However we accomplish that, that is our target in our growth, so we still stick to that and we believe that that is a doable objective.

For example last year we said the same thing, and we are probably going to be at 22% or 23%, even in a bad year. So I am looking for our Company to produce at 20%; but how we get there and all the details will be more available at the December call.

Okay, great. You mentioned your dependence on JT8D, in the 2001 timeframe. Obviously, that has come down real significantly based on the increase in the size of the catalog, those sorts of things. You guys have give a number on that? Is it under 20%?

I am going to give that to Eric; but at that time, it was 85% 90% JT8D. Now we are in all types of parts, all types of engine, all types of accessories. It is just a broad -- so it is so diversified that no part, engine product, accounts for anything like what it did.

So it's a totally much more diversified Company. But I will let Eric answer that specific question.

Yes, J.B., I think what my dad is referring to on 85% or 90% the JT8D, the baby JT8D sales as of 2001, our total JT8D sales at that time was about 57% of our PMA sales. Today, our baby JT8D sales are less than 5% of our total sales, so that is much smaller.

Of course, you have also got to add in the JT-8/200 and some CFM 56-3; But I can tell you that it is significantly smaller, not anywhere close to the percentage JT8D represented in 2001. It is nothing even close to that.

Of course, the parts development for those platforms is virtually zero, correct?

That's correct.

Okay. Then maybe one for Victor. Victor, on Flight Support -- or I mean on Electronic Technologies, your organic growth was down a little bit; but obviously the margins have been trending up pretty nicely over the course of the year. On the top line, has there been anything that kind of slipped from Q3 to Q4?

I know we experienced kind of some slippage there. Anything going on in particular this quarter that was extraordinary?

Yes, J.B., this is Victor. The answer is no. I think in the conference call for the second quarter, I indicated that we thought that the growth rate of the front end of the year would not be matched in the back end of the year.

Okay, so things are going along as planned?

Exactly. (multiple speakers)

For the most part. There are always -- with the number of companies we have there are always moving parts. Some do better than we expected, some don't do as well as we expected. And that is kind of par for the course at this point.

J.B., just wanted to add, keep in mind that last year's third quarter was extremely strong in the Electronics Group, where there was some pushout from first half of '07 to the second half of '07. Whereas this year has been more -- other than a little bit of pushout in the first quarter, we have been kind of keeping up to our expectations.

Right, yes, I think you had a 31% margin last year. Okay. Then one last one for Tom. The R&D tax credit, if that gets reapproved, that is maybe, what, a point of tax rate? Something like that?

Yes, last year it was about 1.8% effective rate. Again we had a situation where they retroactively did it for '06; and we [already] previously quantified it.

So in terms of EPS, if it were the same amount as -- if they did the same thing and made it retroactive, it would be a penny or two, something like that.

Okay.

(inaudible) was in '06 when they retroactively adopted it.

Okay, thanks a lot for your time.

Chris Quilty from Raymond James & Co.

Thanks, gentlemen. Glad to hear, Larry, the plans to speed up the development of new parts. But a question here for you. To get to that from 400 to 500 sort of run rate, what does that necessitate either in terms on incremental hiring on your part or things you might need to do at the FAA to increase to that level of parts approvals?

I am going to let Eric respond to that because he is more in the detail of it.

Chris, to answer your question with regard to hiring, I would say nothing really out of the ordinary, which we are doing right now.

With the FAA, I would say we are already there. We have great cooperation between HEICO and the FAA. I would say it is just a matter of ordinary course of business for us. There is nothing special that we are doing in order to -- nothing special that we are having to do in order to go from 400 to 500.

Okay. Presumably, we are talking number of parts, but you are also I would assume looking to increase the value of the parts. Or do they stay relatively static?

No, we always look to increase the value of the parts. I would say that we are -- it is hard to determine exactly the run rate on PMA, because sometimes we may get the actual PMA supplement in the next quarter or the next month, and so it depends on where you draw the cutoff line.

But I would say we are pretty close to that rate right now, depending on when some of these projects finish up.

Okay. I think the second item you mentioned in terms of compensating for end-market slowdown was speeding up the approval process by customers. I was just wondering. In the last conference call, you mentioned that you are seeing sort of a record level of inquiries.

But is there anything you can do on your end to help them speed up that approval process? Or that is a trend you're seeing and you think it will carry through?

Well, two things. One, you alluded to the customers speeding up the process on their end. Yes, they are under financial pressure. PMA has reached a tremendous level of credibility. We are receiving more customer interest and enthusiasm than we have ever had. I have worked at HEICO now for almost 19 years, and I have never seen this level of enthusiasm or market penetration, interest in what we are doing. So I think the customers are doing whatever they can to try to speed it up on their process. Number one.

Number two, we have an internal program going where we have mapped out the entire process from when we find a part to do, whether we find it or an airline brings it to us, all the way through the design, manufacture, stocking, sale, and approval and use at the airline. By mapping that process, we think there is considerable benefits to modifying the process, and that should really speed up the whole process and permit the customers to achieve their objective, which is get the savings quicker. So, that is how we are tackling it at both sides.

Okay. I think the final element of that plan was mentioning looking for new customers. Does that involve bringing in new airline customers? And on that same point, can you give us kind of an update on where you are with your BA initiatives?

Yes, it involves bringing on new operators. There are plenty of operators out there who we didn't do as much business with because we were primarily engine focused. Now, we are not only engine focused but we are non-engine focused. And we are also by far the leader in that segment as well.

So, we are continuing to find new airlines that want to work with us. You know, we are very careful to not violate any customer confidentiality, so it is difficult to speak to any one customer.

But I can tell you that our new customers, I think, are very, very pleased with the level of immediate savings that they have been able to generate as a result of working with us. Their enthusiasm has never been higher in terms of approving new parts and opening up the scope of what they do with us.

Okay. Given -- I mean, in the last conference call you mentioned the fact that many of the recent capacity cuts that were being announced were expected on your part. Customers had already communicated that, and it was baked into your guidance.

Given the number of incremental announcements that have been made since the last conference call, is it reasonable to assume that the end-market environment is worse than you would have anticipated at the start of the year or since your last conference call?

There is no question that the level of retirement has increased since the last conference call. A number of airlines came out with further commentary and aircraft fleet plans, which were not included in the numbers when we gave the prior conference call. Much of that did impact the third quarter, because in particular in the engine business, when an airline knows it is going to put down a fleet or a part of a fleet, they stop overhauling the engines typically. Or at least they don't [induct] new ones. So you see an immediate impact there. And we definitely saw that in the third quarter.

We haven't seen I would say in the last roughly 30 days really any additional impact to our customers that didn't exist prior to 30 days ago. So we think that of course with fuel moderating and with the plans that they have already announced, hopefully we have got most if not all of that baked into our projections going forward.

Okay. One final question. Given the likelihood that regardless of who the next administration is, capital gains tax rates are likely to go up, have you seen an improved outlook in terms of the acquisition pipeline? Which for HEICO has traditionally been sort of the small S Corp business proprietor that would be most impacted by those tax changes.

I will answer that. We have a number of companies on the list. I have been told by bankers and investment bankers that people are getting concerned, and some of these people are putting their companies up for sale. We haven't seen in an enormous increase, but we certainly have a full plate of opportunities that we are doing our normal, thorough due diligence.

As you know, in these acquisitions you have got to be very, very careful as you go along. So.

And pricing has definitely become more flexible. These crazy prices that we couldn't compete for -- or wouldn't compete for because of our discipline -- those prices have come down. So I think there are going to be plenty of opportunities.

We have gone slowly so far. This year has been a slow year for acquisition for us. Part of it is because we have so many opportunities and we want to make sure we pick the best ones in a disciplined way.

But the only question that I have, which confused me a little bit about what you just asked, you indicated that no matter which administration comes in that capital gains are going up.

I only thought there was one administration if it came in that would result in higher capital gains rates. Have you heard somebody? Have you heard something from the McCain camp that I have not heard?

No, I haven't. It is whether the McCain camp would be able to offset congressional moves in that regard. So obviously it is all subjective at this point; but tax rate is likely to go up by the time I retire, that is for sure.

Probably so. Do you have any other questions? Hello?

Tyler Hojo, Sidoti.

Hey, good morning, guys. I want to just touch on market share gains. I know last conference call one of you kind of couched your current market penetration, on just kind of your current parts portfolio, at 50%. You know, certainly understandable with capacity coming out that it is going to impact your business.

But are we going to see any sort of offset from market share and pricing and new part introductions? Or is this all going to take maybe a little bit longer than benefiting the next quarter, the next year type of thing?

Tyler, this is Eric. I think I made the comment about roughly 50% market penetration on our existing products. And yes, I agree with you; I think that that is a longer-term thing. We can't just turn an immediate switch and get the benefit. We will get some of that benefit, but I think that it will occur over time. It is not going to be something that is immediate.

I think that this is something that our program to speed up the approval process, both internally as well as at the customers, will ultimately help that. But it is definitely a longer-term. You know, in more intermediate term, one-, two-year away a project to pick up the benefit of that.

Okay. So say if I was one of your customers and I said, hey guys, I want to buy some more PMA parts, whatever it is. How long would it take to get all of the approvals through so I could actually go ahead and do it? Would it takes six months? Would it take a year?

Well, legally you could start buying the parts right away. Now, we manage our inventories fairly carefully; so if you were a large operator and you were going to have significant demand, it would take us a certain amount of time to manufacture the parts or have them manufactured. So I would say that would be the longest leadtime there.

But, different airlines have different approval processes. Some just go ahead and check, make sure we have FAA approval; and others do more thorough evaluations, which are not required by law, but really are legacy approval processes.

So it really runs the gamut from you could buy it right away to as soon as you got your engineering department in line and got the parts loaded in your computer system. And if you are not very quick, that could take some time.

Okay, but it is safe to say that your conversations with your existing customers -- and I guess you were saying some of the newer customers -- has picked up of late?

Definitely.

Okay, that is good to know. I guess switching over to something else, just, Tom, your CapEx guidance came down a little bit. I assume that is just the wish list that you have being pared down a little bit. Is that accurate?

Yes, I think we have commented previously that at the start of the year when we give our CapEx target they are typically a bottoms-up target estimate from our business units; and that is what we go with.

I think Larry has commented, typically we understand our CapEx budget and then I think that is what you are seeing so far. It is not a major strategy change or anything like that or certainly not a cutback on our part not to buy stuff. It is just a matter of the normal process.

Okay, that sounds good. Just one quick follow-on here. I guess just looking at what the stock has done recently, I mean has it come up in conversations amongst you all just to potentially initiate a share repurchase at this level?

The answer is yes; and the Board constantly reviews share repurchase. We have approval to purchase shares. It is outstanding approval.

The balancing act that we go through -- a lot of things. But one thing that we consider in repurchasing shares, the benefit between repurchasing shares or using the same funds to expand the Company and to acquire income-producing assets, which then generates cash flow, grows the Company, expands the Company, as opposed to shrinking the base.

Philosophically, unless the stock crashes and -- it makes more sense when we do an earnings per share accretion analysis, it makes more sense to buy good operating companies, which we have done, at good prices. Particularly in this environment, when one of the earlier questions was, do we see a lot of deals out there at good prices? And the answer was yes.

So we would rather keep our powder dry as a basic strategy. Now, you know, if the stock collapses and people panic and run, try to get out and so forth -- which I personally don't expect but you never know -- then we make a different evaluation.

But given my druthers, I would rather expand the Company. We have been able to grow this Company at 20% a year for a number of years, both internally and externally. That is this CEO's preference and I think our Board's preference for the utilization of money.

If we don't make any acquisitions, if you look at our debt on the balance sheet, we showed long-term debt of about $42 million. You just do arithmetic and cash flow, and we have given you an indication. If we don't do acquisitions, we are going to have a very, very quick cash buildup. This is going to be a cash-rich Company.

I think we will make acquisitions; but we generate an awful lot of cash, as you know. So I think that that is really our preferred policy as opposed at this point to stock buyback.

Okay, thanks very much.

Jim Foung from Gabelli.

Larry, I just have one question on this 500 new parts you plan to make in 2009. If you get to that quantity, when do you begin to see the revenues from that? Is that like a 12-month leadtime from the time you make the parts to the time you might see incremental revenues from that?

Well, it will start -- if we do 500 in a year, that is over 12 months. The first part that is made, the first one that comes out of the first day of the year, we will start to see revenue throughout the year. The one that comes out on the third day, we will see that. So I would say we should begin to see some revenue from roughly 200 to 250 parts; that is kind of the 50% where we will see some revenue.

We will see more revenue from the parts entered into first day; and we will see no revenue for a part that is completed on the 360th day. But I would say 240, 250 parts, we should begin to see some little bit of revenue in the first year.

Okay, so from the time the product is brought to the marketplace, there is really no gap between that period and the time you will be able to generate revenues from that part then.

Well, truthfully, it depends on the particular part, what the inventory of the part is, how it is [billed]. So it is impossible to really predict exactly on any one particular part when we will start to see revenue.

We say that we reach a stabilized revenue between three years and four years out. So let's take a part that we would guesstimate would have $100,000 a year revenue; in the first year we would see $25,000; in the second $50,000; in the third $75,000; and the fourth would be at $100,000. That is without price increases in kind of a simplistic view. But it is reasonable.

Our look backs and the computations and the data that Tom's people keep pretty much support that. It is a reasonable flow as it picks up over a period of time.

Right, okay. Then secondly, you talked quite a bit about acquisitions. Are you fairly confident that over the next 12 months that you are prepared to close on an acquisition for the Company, given what you have seen so far?

Well, am I fairly -- I have a high degree of confidence that we will. Of course, I don't want to promise any -- oh yes, we definitely well; because you know acquisitions, you can get down to the wire and you can have a problem and the acquisition doesn't close after you have done due diligence. Either you find something about the acquisition, the acquisition finds something about you, and it would not close.

But we certainly have Bill Harlow, who is our M&A guy, certainly has a number of acquisitions on the list. I get an updated list every week, and I go over it with him carefully, and we spend a lot of time talking about it. So there are a number of targets out there, a number of them that we are doing due diligence, kicking the tires. Victor and I were out in California looking at a couple of companies out there.

So, there is certainly enough companies. I think we are seeing the tax-motivated seller that Chris Quilty kind of referred to, because of the possible increase in capital gains. So I think these guys are more motivated.

We have to be very careful, because in the aerospace space, some of these people are coming off highs; and we don't want to pay the top price and find that they have a problem.

But I feel pretty confident that we can make acquisitions. We certainly have the financial capability to make large acquisitions. We have such little debt. We have such great cash lines availability, and the banks come to us all -- even in today's credit crisis and everything else, banks are coming to us because of our ability to generate strong cash flow.

Our EBITDA, as you know, close to $120 million this year, it is basically unburdened. So I am pretty confident that we will be able to make some very good acquisitions.

That's great. Thanks so much. I look forward to hearing from you again next week at our conference.

Thanks. Looking forward to seeing you at the conference.

[Frank Looten] with [Point Blank] Capital.

Good morning, guys. Congratulations on a great quarter.

Thank you.

I wanted to see if you guys could talk a little bit about what you view per the optimum capital structure of this business. As I look back at the 2001 cycle, you guys had about $41 million in EBITDA; and as you said, a large percentage of your business was one particular product. You are now four times or three times that in EBITDA, and we are at the same level of debt.

So just wanted to kind of get your views on what type of leverage you think this business could have on it, and go from there.

Well, we have always felt and our Board feels that a high degree of leverage is not really in our best interest. We realize that there can be fluctuations in this industry, the aerospace industry. We know that some of the players in there, the airlines, can run into some financial problems as you are seeing.

So we have to be -- we are a small, medium, medium-sized company, and we have to show the industry that we are very strong financially. We never have a question when we go to sell a customer -- can you guys deliver? Can you back it up? And it is because of our strong financial standing and our relatively low debt to equity. That is a big help.

When things turned south in 2001, we were able to without any sweat or stress be able to significantly increase our R&D spending and do what we had to do to grow the Company, without running around looking for capital and banks and all this kind of stuff.

So that is a strategy that we have adhered to, a relatively low debt to equity. Now, if there is a great acquisition opportunity, with what we perceive of as very strong cash flow capability and so forth, we might get more aggressive.

But you know, I don't think that philosophically this management is a one that is going to put this Company in jeopardy, shoot for the moon and do that. I have said many times that following our strategy of low debt, we are able to grow at in excess of 20% annually net income and with very little debt.

We believe that in the foreseeable future, we are going to be able to do that and we are not going to wind up in a bankruptcy court. So if we can grow a company continually at 20% or 25%, and I don't know what the compound annual growth (technical difficulty) in the past five years our compound annual growth net income? Tom says it is in the high 20s. So we say 20%; we shoot for 20%; but the actual is in the high 20s.

And we can do that without selling stock. Last time we did an offering for equity was -- dilute shareholders was in 1999, so we didn't have to do that. We can do it without incurring a lot of debt. We think that that is wise financial management, and we believe that we can continue that growth with the capital structure that we have. And that is what we plan to do.

Got you. One might stipulate that there is a large acquisition out there that has high free cash flow in your business that you know better than any other business, and that you could get higher returns on equities by taking on some debt and buying back some of your own shares. But that is an opinion.

Well, [if] there -- I don't know which one you -- if you have something specific in mind, let us know about it and if we haven't seen it --

I was talking about your own Company.

Pardon me?

I was talking about HEICO.

Yes, but to do that, to do that, as I said earlier -- this is just philosophy, and there is no right or wrong. We think that we can build a progressively larger Company, grow the bottom line, expand the Company for the shareholders, and not -- Buffet does the same thing. We are not as smart as Buffet, but he doesn't go into a market and buy -- he is growing the company, building a valuable franchise.

That is what we are trying to do for shareholders, of which we are the largest shareholder, so we are doing that with our own money. More than anybody else, any other single investor's money.

Every time we make an acquisition, we are not spending some theoretical shareholder's money. I get paid as a CEO to manage somebody's money -- I am managing my own money, and then all the other shareholders are invited to come in with us.

The psychology is very similar to what Buffett does. He has got all these shares and he says great, guys, it is open for -- this is what we are doing. If you want to come in, we think it is a great thing. I have shown you great results.

HEICO is a very similar thing. The philosophy is a similar thing. We are not as great as Buffet and I don't try to say we are. But the basic structure -- we are not in this for short-term capital -- what is the word I want to use? Financial manipulations or to get the -- add a few pennies a share by doing some other kind of stuff.

We want to grow, base, this Company, and number one cash flow. That is our number one. I want to see loads of cash. The first thing I look at is cash.

So that is the overall strategy. But I think we can do better buying good businesses, good cash flow, and we borrow to buy that on our bank lines; and the new cash flow will service the debt.

If you buy your own stock back, you are reducing -- you have to pay back the debt that you incurred to buy the stock back out of your existing cash flow. By buying companies, you get cash flow.

On the other hand, again, I said this before, we always look at this. We are completely sensitive to it. I am just pointing out -- at this moment that is the philosophy. Could it change? Yes, it is possible we would see a great opportunity and we would certainly consider buying shares back if we felt that was the right opportunity, the right thing to do for shareholders.

Fair enough.

Okay.

We have no further questions at this time.

Well, I do want to thank you all for your interest in HEICO, and for tuning in to this third-quarter earnings report. I hope we will be speaking to you towards the end of December with the annual and the fourth-quarter update and our guidance for 2009.

So. In addition, if during the period you have questions, you want to get to us, any of the four of us are available to shareholders or analysts and so forth. So please call us.

You all have a good Labor Day holiday. Thank you.