HEICO Corp (HEI) 2009 Q1 法說會逐字稿

Good morning, and welcome to this HEICO Corporation fiscal 2009 first-quarter earnings conference call. During this call, there will be break for question and answers. (Operator Instructions).

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

Thank you, and good morning to everyone on the call, and we welcome you to the HEICO first-quarter fiscal 2009 earnings announcement teleconference. I am Larry Mendelson, CEO of HEICO Corporation, and I'm joined here this morning by Eric Mendelson, President of HEICO's Flight Support Group; Victor Mendelson, President of HEICO's Electronic Technologies Group; and Tom Irwin, HEICO's Executive Vice President and CFO.

Before we begin, Victor Mendelson will read a statement.

Thank you. Good morning. 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 in or expressed 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 or requirements which could cause an increase to our costs to complete contracts; governmental and regulatory demands; export policies and restrictions; reductions in defense, space or homeland security spending by US 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 and economic conditions within and outside of the aviation, defense, space and electronics industries, which could negatively impact our costs and revenues; and HEICO's ability to maintain effective internal controls, which could adversely affect our business and the market price of our common stock.

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

Thank you, Victor. And now before reviewing our first-quarter operating results in detail, I would like to take a few moments to summarize the highlights of what we consider a reasonably good first quarter, especially in light of the current global economic conditions.

Consolidated net income increased by 12% to $0.42 per diluted share for the first quarter of '09, up from $0.37 per diluted share in the first quarter of '08, and this was despite a slight decline in net sales. Although our airline customers have reduced capacity between 5% and 10% from last year, net sales of Flight Support were down only 3% in the quarter, indicating continued success in penetrating the market with our new products and services.

Typically in market downturns such as the current one, we lay the groundwork for future market-share expansion as customers become more committed to our cost-saving products. Within HEICO Electronic Technologies, we are seeing continued strengthen our defense-related businesses, include space and homeland security products, but continuing weakness in customer demand for some of our electronic products, including demand for medical equipment end markets. For the quarter, overall net sales of Electronic Technologies were down 3%.

In January, we paid our 61st consecutive semi-annual cash dividend since 1979. The dividend was 20% higher than the prior year, or $0.06 per share versus $0.05 per share, reiterating our Board of Directors' continuing confidence in HEICO's strategies and financial strength and our willingness to reward shareholders while retaining sufficient capital to fund our internal growth objectives and acquisition strategies.

We are also pleased to report that the IRS completed its audit relating to the Company's qualified R&D tax credit claimed for fiscal years 2002 through '05. The audit settlement resulted in an increase in net income of $1.1 million, or $0.04 per diluted share, in the first quarter of '09.

Our cash flow and balance sheet remain strong. As of January 31, the Company's debt-to-capital ratio was only 8.6%, with a net debt -- that's debt less cash -- of $36.2 million. And we have no significant debt maturities until 2013.

As for acquisitions, we have plenty of capital available on our bank lines, where we pay very favorable interest rates due to our strong credit rating. Our weighted average interest rate at January 31, '09 was less than 1%. And I like to joke with my staff and say we are considered like Treasury bills.

Further, despite the economic challenges, we remain true to our principles of growth, driven primarily through development of new products and services. While we are aggressively pursuing cost efficiencies and cost reductions, we actually increased new product development spending in the first quarter of '09 by approximately $600,000, or 15% over the first quarter of '08. This will, we believe, drive future sales and earnings. That is the way it has always worked for HEICO in the past.

Now, drilling down into the detail items on the P&L, net sales -- consolidated net sales in the first quarter of '09 were $130.4 million, reflecting the previously discussed sales of Flight Support and Electronic Technology segments. Our net sales in the first quarter by market were composed approximately 71% from commercial aviation -- this was the same as in '08; 16% from defense and space -- it was 14% in '08; and 13% from other markets, including medical, telecommunication and electronics -- and that was about 15% in '08.

Our consolidated operating income in the first quarter of '09 was $21.4 million compared to $23.2 million in the first quarter of '08, reflecting lower operating income from Flight Support, partially offset by an increase in operating income from Electronic Technologies, as well as a decrease in corporate expense.

Operating income of Flight Support in the first quarter '09 was $15.6 million compared to $18.9 million in the first quarter of '08, and this reflected the lower sales volumes and higher R&D expenses.

Operating income of Electronic Technologies in the first quarter '09 increased 19% to $8.5 million, up from $7.2 million in the first quarter of '08 as a result of higher operating margins. Corporate expense in the first quarter of '09 decreased to $2.7 million from $2.9 million in the first quarter '08.

Our consolidated operating margin in the first quarter of '09 was 16.4% compared to 17.3% in the first quarter of '08, and this was a result of lower margins within Flight Support. Operating margins of Flight Support were 15.7% in the first quarter '09 versus 18.5% first quarter '08, principally reflecting the impact of lower sales volume on gross profit margins, as well as higher R&D expenditures.

Due to the higher incremental margins of Flight Support, particularly in our PMA parts sales, the lower sales volume had a disproportionate effect on our gross profit margins.

Operating margins of Electronic Technologies improved to 27.6% in the first quarter of '09 versus 22.5% in the first quarter of '08. This reflected a favorable product mix, and the margins approximated those experienced in the full-year fiscal '08.

Diluted earnings per share increased 14% to $0.42 in the first quarter of '09, up from $0.37 in the first quarter of '08, reflecting the IRS settlement in the first quarter of '09, as well as the increased operating income within Electronic Technologies.

Depreciation and amortization expenses were approximately $3.5 million in the first quarters of '08 and '09.

As mentioned earlier, R&D expense increased 15% to $4.8 million in the first quarter '09, up from $4.2 million in the first quarter '08, and we are confident that these increased expenditures will be well-rewarded in the future. The addition of new FAA PMA approvals continues to be a critical strategy to support our medium and long-term growth. We are targeting approximately 500 new PMA certifications in fiscal '09, up from about 400 in fiscal '08.

We also have a number of new products under development in Electronic Technologies. As I have mentioned many times before, we believe our focus on continuing new product development is fundamental to our growth strategy. We remain committed to this long-term strategy even as we address the near-term challenges of global recession.

SG&A spending as a percentage of net sales decreased to 17.2% in the first quarter '09, down from 17.6% in the first quarter of '08. The decrease to $22.5 million in the first quarter of '09 from $23.6 million in the first quarter of '08 is principally due to lower operating costs, principally personnel-related, associated with the decline in net sales.

As previously mentioned, we are pursuing cost efficiencies and cost reductions in all of our businesses. We have always tried to operate on a lean basis, and some of the efficiencies have been the elimination of some workforce positions and squeezing down -- and only essential travel is being conducted.

Interest expense in the first quarter of '09 decreased to $195,000, down from $862,000 in the first quarter of '08, principally due to lower interest rates and a lower average balance outstanding under the revolving credit facility in the first quarter of '09. Our net debt was only $36.2 million as of January 31 '09.

The Company's effective tax rate decreased to $27.6 million for the first quarter of '09 compared to $34.1 million in the first quarter of '08, and this reflects the IRS settlement previously mentioned.

The minority interest share of consolidated income was $4 million in the first quarter of '09 and $4.6 million in the first quarter of '08, and the decrease in the minority interest share of income in the first quarter of '09 compared to '08 was attributable to the acquisition of additional equity interest in certain Flight Support subsidiaries in which minority interests exist, as well as the lower earnings of Flight Support Group.

Moving from the P&L to the balance sheet and cash flow, our financial position remains extremely strong. Cash flow from operating activities in the first quarter totaled $5.2 million compared to $9.8 million in the first quarter of '08. Our working capital ratio, which as you know is current assets divided by current liabilities, strengthened even further to 4.0 as of January 31, '09 over 3.1 as of October 31, '08.

DSOs of Accounts Receivable equaled 53 days January 31, '09 compared to 52 days October 31, '08. We continue to closely monitor receivable collection efforts to manage our credit exposure in light of economic strains facing many of our customers.

The inventory turnover rate as of January 31, '09 equaled 149 days versus the 123 days as of October 31, '08, reflecting higher inventories in Flight Support, where lower sales volume in the first quarter '09 resulted in higher inventory levels. We are adjusting production schedules to better match customer demands, while at the same time managing production efficiencies.

No one customer accounted for more than 10% of net sales, and our top five customers represent approximately 22% of consolidated net sales in the first quarter versus about 21% in 2008.

Year-to-date net borrowings during fiscal '09 totaled only $3 million under our revolving credit facility. Cash invested in acquisitions totaled $12.8 million in the first quarter '09, all of which related to acquisitions completed in previous years -- that is, additional purchase of equity interest and payment of additional contingent purchase consideration.

CapEx first quarter '09, approximately $2.6 million, in line with the current estimate of $10 million to $15 million for the full fiscal '09.

Moving on to the outlook, as we look to the balance of fiscal '09 and beyond, we are cognizant of the difficult global economic landscape in which we are currently operating. We have accelerated our commitment to develop new products and services in order to increase market penetration with our existing and new customers and to identify select acquisition opportunities. At the same time, we are maintaining our strong financial position.

And further, we believe that the long-term prospects of the commercial airline industry still remain quite strong. Current market forecasts of airline capacity in 2009 project global capacity reductions ranging from zero to minus 5%, and forecast MRO spending reductions in the range of 5% to 10%, down from 2008.

Based on these current market expectations, we are updating our targeted full-fiscal '09 diluted net income per share to be approximately flat with fiscal '08, and net sales to a range of flat to down 5% when compared to '08. Potential acquisition opportunities could add to these growth targets.

We continue to target '09 cash flow from operating activities in the area of $75 million to $80 million, and as mentioned earlier, CapEx are expected to range between $10 million and $15 million.

Even in the face of airline capacity reductions, we are confident that the value proposition that HEICO products represents and the accelerated rate of our new product development will give us excellent opportunities for continued success.

In closing, we face near-term economic challenges. We remain committed to our long-term strategy of developing and marketing new products and services, maintaining the high quality of these products and services, while offering our customers cost-saving opportunities and focusing on strategic acquisition. This is the same disciplined business model we have followed since 1990, a period over which HEICO has achieved a 20% compound annual growth rate in net income.

One last closing comment. We faced a similar situation after 9/11. We significantly accelerated our R&D development, and after 9/11, starting perhaps a year, year and a half later, and for the next six or seven years, we were running at a compound annual growth rate, top-line and bottom-line, somewhere between 27% and 29%. We are optimistic that we will achieve very strong growth rates if we follow our same disciplined approach.

Those are my prepared comments, and I do want to open the floor for any questions that the callers may have.

(Operator Instructions) Arnie Ursaner, CJS Securities.

Good morning. A couple of bookkeeping questions first. What sort of tax rate guidance would you suggest we have for the year?

This is Tom Irwin. If you look at the first quarter and adjust it for the R&D tax savings that is add back, the one-time benefit in the first quarter, you get to about a 34% effective rate, which is in line with last year.

Okay. And another bookkeeping item. I assume currency was not a material impact either in your results or in your guidance. Is that a fair statement?

That is correct, Arnie.

Larry, in your prepared remarks or in your comments on your last conference call, you indicated at that point that -- this was in late December -- you indicated that if you only achieved your guidance at that point, you would be extremely disappointed. And at that time, the IATA data was talking about a decline of 1% to 4% in global airline travel. So I guess the real question at the back of my mind is what has changed in a month that has made you significantly more cautious than you were a month ago?

That's a good question. And I look at it really as really almost two months that we were looking out. But the main change is in November and December are normally slow months for us in the Flight Support Group. For some reason, in October normally is a relatively stronger month. November/December are weak months, and we see a big pop back in January. And we were expecting that, based upon conversations with airlines and talking to customers -- big customers, and they were indicating that January would be a strong month.

Unfortunately, that pop didn't happen. I can tell you -- I hate to say -- February appears to be better than January. Maybe we are getting the January effect in February. I'm not sure. But I don't want to give anybody too optimistic an expectation. But the main issue was that January didn't do what it normally does and pop up. I had expected it to be, and I was disappointed.

I was very disappointed, and Eric was very disappointed, and it is going down the line and there is a lot of yelling and yipping about moving product out the door. Unfortunately, if airlines are putting planes away and taking them out of service, it is very difficult to convince them to buy parts that they don't need to fix up an aircraft.

So that was really the main driver. So at this point, it is very, very difficult to see the outlook going forward in this current year. It is -- the visibility, when I speak to people about visibility, almost in every industry, I get the same response. And it is very, very difficult to picture that.

The one thing I do want to emphasize is that none of this, in our opinion, is any loss of market share. And typically, what has happened in the past, when people defer purchases of parts, there comes a day of reckoning. Ultimately they put the plane in service, and then there is a huge demand and there is a scramble to get parts yesterday. So at some point in the cycle, we believe they are going to use the parts.

And if I knew when this economic downturn was going to end or turn around, I would have a much better idea of when they are going to need those parts. And I think most people can just watch as they put planes into service, they will.

But there is another thing. The greater proportion of planes taken out of service were US domestic. Those started before the foreign. So I think part of it was seeing the impact of some of the domestic early on, and we had expected it to pop back. I don't know if that is helpful, but that is what was what I saw in December and that is what I see now.

Real quick, one, again, bookkeeping question. I think you said you would expect 500 new parts this year. Is that correct?

I did.

Okay. And remind us again of the seasonality of the repair work in MRO. Doesn't a lot more of it happen in kind of the February/March period when planes are less in demand than in the more critical seasons?

Typically, we would see greater demand in our third and fourth quarters. Typically, what drives the engines off wing is when the temperatures rise after the spring and the exhaust gas temperature margins go down, they have to overhaul the engine, and that causes a pop in demand, typically.

Okay, thank you very much.

Tyler Hojo, Sidoti & Company.

Good morning, everybody. Just a follow-on to Arnie's question there. Just in regards to the guidance, does it potentially reflect capacity reductions that have not yet been announced by your customer base? Is that maybe one way to look at it?

We try to factor that in to give you our best thinking on it. But truthfully, Tyler, it is almost impossible to know. They tell us one thing, and then that may not happen because things are happening in their own service. They see their number of passengers falls off, so then they change their mind and they try to give us some indication of what is going to happen, and then it changes.

It also, when it comes back, it changes -- as I indicated before, it changes the opposite way. They don't tell us, and all of a sudden we get a call, hurry up -- we need the part yesterday. So it is very, very opaque and very, very difficult. We try to do the best guesstimate that we can in running our business and then conveying that information to you and to the investing public. It is -- to say it is imperfect would be an accurate statement. We try our best, but it could be higher or lower.

Right. I understand that. And I guess maybe since you highlighted kind of the last downturn, kind of '01 to '03, my understanding was that you were more exposed to some JT8 engines that today you have a little bit more diversity. So is it a safe assumption to think that you will fare better in the current downturn than you did back at the early 2000s?

Tyler, I think what you said is an accurate statement. In the 2000-2001 9/11 issue, they took planes out of service never to put them back in. There were a lot of 727s that had JT8D engines. Those were taken out and never returned.

In this case, many of the engines that they are taking out are temporary and we expect them to return to service. So we would see a resumption of the part flow sales to repair those engines. So we don't think it is a permanent change; we think this is a more temporary change.

I understand that, but the point I was trying to make was weren't you more overly exposed to the engine that was coming out of service back then than you are today?

Yes, definitely.

All right, good. And just a couple of housekeeping things here. Last conference call, I think you indicated that you were looking to pay off outstanding debt some time in the first half of the year. Does that still stand, or have things been adjusted a bit here?

No, actually as it relates to our outlook for cash flow from operating activities, we really didn't change our guidance there, which is somewhere $75 million to $80 million. So based on that, we would expect to be out of debt sometime around midyear.

Okay, great. And just in regards to the 500 new parts that came out this year -- or that you're expecting to come out this year, are you able to give us an idea of maybe how many you introduced in the quarter?

Typically, our parts come out -- the majority of the parts come out in the second half of the year.

Okay.

We are performing now consistent with prior years. But most definitely come out at the end of the year. Just like last year and the year before and the year before that, most come out at the end of the year. So I would say we have year to year a pretty consistent flow.

Great. Thanks for that.

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

Good morning, guys. Just a real quick sort of housekeeping question on the acquisition number on the cash flow statement. You mentioned that's all just additional purchase price. So those numbers we see on the sales are all organic, right? There is no -- you didn't have to pick up any more revenue due to that consideration paid on those acquisitions.

That is correct. In effect, there were no new entities in this year. Substantially all the sales are changes related to organic as (multiple speakers) acquisitions, and they were simply additional equity interest. We bought 10% of one entity and 14% of another, minority shareholders basically.

But it didn't change the way you had to recognize the revenue, so that is just pure organic that we see.

Exactly. Because the entities were already -- 100% sales were already in our consolidated --.

Got you. Okay. And then for Victor, can you kind of remind us what the end market exposure is there? How much is medical now, and how much is still the defense side?

Consolidated at HEICO Corporation, the corporate level, probably about 5% would be on the medical side. And I'm sorry -- the second part?

I was just trying to get a breakdown within Electronic Technologies of what the end market exposure is. I know most of it is sort of space, defense type stuff.

Yes, that's correct. I mean, I would -- within the ETG I would say roughly half is defense, sort of straight defense; roughly 15% or so would be probably medical; and roughly 15% or so would be space. And then the rest split in industrial markets, somewhere around there -- 15% to 20% medical, 15% to 20% space. But (inaudible) space a little complicated; some of it drips into military space. We don't always know what the end market is.

Sure. And I guess what I am hearing, Larry, from you is that what you are seeing is kind of a customer destocking really, and maybe that is -- the impact of the retirements is one thing, but really it is just maybe a cash preservation strategy from customers. There is no -- this isn't any sort of trend that you are seeing. I hope I'm reading that correctly.

I think you are reading it exactly right. And as I mentioned, we are very concerned with market share, and we don't believe that we have lost any market share. Perhaps we may be picking up market share, but it is being offset by the demand. They are saving cash, and they are not repairing these planes when they put them down. But as I say, there is going to be a panic to get parts.

I mean, that comment, my last comment, is based upon our prior experience. Every time this happens, they scramble to get the parts, and they can't get them fast enough. So we would assume that over a normal business cycle, we will see a lot of this business return. But when it will start, we don't know.

One last thing, maybe Eric you could comment. Two things I've seen, obviously the decline in fuel prices has really extended the economic life of these planes, and I would guess that has some positive implications for you. And the other thing I think we've seen is some carriers have unfortunately hedged fuel at much, much higher prices, which leads me to believe they will be struggling to find ways to save money, which would also have positive implications for you. Could you maybe comment on those two statements?

Sure. J.B., first of all, with regard to the fuel hedges, you're absolutely right. And the savings off of the reduced price in fuel has been delayed for those carriers -- for a number of carriers. And that gives them a lot of confidence going forward, you're right, with regard to the older equipment. Of course, with the credit crunch which is going on is reducing the airlines' ability to buy new equipment, as you pointed out. The fuel price is making it more reasonable to keep the older equipment in service, and that is the sweet spot for us.

So as the airlines are in this situation, they are becoming even more focused than ever on the selection of alternative materials. And they recognize the FAA has approved the use of all these materials. Most of the major airlines out there in the world are flying nearly all of them. And the opportunity is tremendous. So when times get tough, they start to devote additional resources to the approval of alternative materials, and that is what we are seeing today.

I really believe strongly that we are laying the groundwork for our future recovery by getting these parts approved at the FAA as well as at the airlines. We are able to do things with the airlines that is really very, very unique. And there is a huge focus on a reduction in operating costs. So that plays very well for us.

Great. Could you make any general comment on maybe the level of inquiry from -- I mean, I guess there is not that many new customers -- but increased penetration at current customers?

Yes, the level of inquiry I can tell you has never been higher.

Thank you, guys.

Eric Hugel, Stevens.

Good morning, guys. Could you talk about -- I guess first, ETG margins looked really nice in the quarter. You talked about mix. Can you talk about the sustainability of those levels going forward? Usually your first quarter and is the lowest. Can we expect higher as we go forward into the rest of the year?

The answer is I wouldn't expect to see higher margins going forward. Hopefully, somewhere flattish. I think that we had a very good mix in the quarter, and that is what particularly drove us. And we will have to see as things progress, because visibility generally for us right now is less than it was.

Is the good mix reflective of -- you talked about weakness in the medical. Is it reflective of the medical business didn't hit, so you didn't have the lower margin part of the business?

That may be a little bit of it, but I wouldn't say so, because where it was slower in medical, we had lower margins because of slower things --. I think it was just a very good mix on the products, really, the defense and space and industrial, actually, product -- I call it industrial, but some of it's telecom type, tech industry product -- that was shipping.

Okay. It was my -- switching back to the FSG segment, it was my understanding that you did some acquisitions, small relatively, in the first and second quarter of last year. I just wanted to be clear that there was no sort of acquisition growth in your year-over-year 3% comp. Because I was looking at maybe more like a 7% organic growth decline.

No, the acquisitions -- you're right, there were a couple small acquisitions in fiscal '08, but they were basically early in the first quarter. So there is a first quarter of last year and the first quarter of this year, as well.

And there were no other acquisitions. Just one other tiny, tiny one later on; it was actually pretty much of a startup.

Okay.

So the answer is yes. [It's] baked in the growth numbers, basically it is all organic.

Okay. Fair enough. And with regards to the R&D for the rest of the year, $4.8 million this quarter. Can you talk about how we should think about that? I mean, is that a good sort of steady-state dollar level? How should we think about that? Or does it ramp up as you guys sort of look to increase further?

I'm sorry, can you repeat the question again?

Sure.

I think that we would hope to increase that. We are looking for additional personnel, engineers, to increase our R&D spending. So we would like to increase the R&D spending, particularly in times like this. When earnings are off -- we don't run the Company to show the highest possible earnings.

I mean, in the sense that if we wanted to show earnings and manipulate earnings, we would lay off engineers, reduce R&D, have the earnings-per-share go up, and we could play financial games. We don't do that. We recognize it is what it is, and in these times, we are trying to expand our R&D efforts because we get a huge payoff when this turns. And that is exactly what happened after 9/11. That is what we expect to happen now.

So I am hoping that the R&D expenditures will go up over the year, which will permit us to develop more parts.

Sure. I guess my final question, I am just maybe scratching my head a little bit, sort of thinking about the macro environment continuing to weaken. I guess there have been some recent announcements out of Asian airlines, like [Jao] and ANA and Singapore, that they are looking at doing significant capacity cuts beginning in April.

And I look at your guidance. I mean, you did about $0.38 X the tax benefit. And I'm assuming you don't have any more sort of one-time items baked into your, let's say, flat EPS guidance. And if you sort of back that out, the implication is on average for the last three quarters of the year, you're going to do around $0.45.

Can you sort of walk us through sort of how you are going to get from $0.38 in the first quarter, again, X the R&D benefit, up to around $0.45 in the face of weakening macro environment, at least in the first half of your year?

I can answer that. We have a number of projects which we expect to ship, a number of new products, services, repairs, parts, that we expect to ship in the balance of the next three quarters. So that is why we do anticipate an increase there. There was a destock -- as one of the other analysts had mentioned, there was a destocking of inventory over the last couple of months, in particular in December. But we do anticipate these new parts to get sold.

The customers want them very badly. They are behind the eight ball. They are under great pressure to get savings, and these products are FAA-approved and offer huge savings. So it is just a matter of burning off their inventory and buying the parts that, frankly, are already signed and committed to HEICO on a long-term basis. I mean, the sales are done. We will ship the parts as soon as the demand is there, as soon as they just burn off their existing demand.

So it's really a timing issue? I mean, you're going to sell the part, but it might not be until next year, potentially -- depending upon how bad the microenvironment gets?

We don't anticipate it being next year. We -- when we missed our numbers in the first quarter, the sales folks went out to the field, and the first thing we always want to make sure is that we haven't lost any market share. And we validated that; we didn't lose market share. It was just burning down of inventory.

So the word that came back was that in the balance of the year, we would in fact sell these parts that, frankly, are already designed, certified and sitting on our shelves. So we hope that they will ship in the balance of '09, in addition to '10. In '10, we will sell the same parts we sold in '09, but new parts that we develop in '09.

Right. That makes sense. And just to (inaudible). You guys don't have any sort of more one-time, like this tax benefit, sort of planned in your expectations, do you?

No, at this point, when you look at our guidance, inherently there is a baked-in about a 12% per quarter average. As you did with the earnings, if you do it on the sales number, it is about a 12% earnings growth, and that is what drives the [S] growth as opposed to any future one-time items.

Great. Appreciate it, guys. Thanks a lot.

Thank you.

Chris Quilty, Raymond James & Associates.

Good morning, gentlemen. Just wanted to follow back, Larry. You had mentioned you didn't see the normal domestic pop you would expect in January. But did you see any kind of a decline in your international, or is there an expected downturn that you have built into your numbers?

I am going to ask Eric to respond to that.

Chris, I would say that the decline was broad-based. It was both domestic and international. And again, it was not a loss of market share. It was, we believe, drawing down of inventories. The airline supply chains are getting very tight right now. There are some airlines that have 12/31 year-end, and they normally cut back, as my dad said, in November and December, which are also short months. They normally cut back in the quarter in January, and of course, the year-end numbers were very poor. And so they didn't order.

There are other major customers who have March year-ends, and so they are watching their inventory right now and their cash position as well.

Okay, so perhaps by the early spring at least we should see relief from any of these inventory adjustments or channel inventory issues and get back to more normalized growth?

That sounds reasonable. Yes, that is what we expect.

Okay. And I know you don't like to give specific market share issues, but if I remember correct, the numbers back in the last downturn, post 9/11, your exposure to the JT8D was probably north of 50%. When you look across either customers, engine types or airframes, is there any of those categories where you would project you have greater than 10% exposure that would be reason for concern?

What we say, Chris, is that we don't have a majority of our sales coming from any one platform. Back in 2001, we had a majority coming out of the JT8Ds. That is not the case today.

Certainly, we have platforms that account for greater than 10% of our sales, because there just aren't that many platforms to go around. So by definition, we would have that. But we don't have a preponderance or a concentration in any one platform.

As a matter of fact, some of the largest sales disappointments were in ongoing programs that are going to continue in service, and there is no plan to remove any of these aircraft. Again, it is more of an inventory destocking situation, where airlines are pushing out engine overhauls and component maintenance and doing whatever they can to conserve costs and drawing down their progress supply chains.

So no, there is no concentration in any one area. It is not even remotely similar to what happened in 2001, other than the airlines are in trouble. They need the savings. We have a credible product, which is FAA approved. And they, frankly, need to expedite the resources to get the parts approved and start buying them.

Got it. And I know you haven't had any announcements, per se, but have you in the last six months picked up any significant new customer wins?

Or is that something likely to happen?

I would say we continue to grow our customer base. We continue to add new customers. Of course, we already have 18 or 19 of the world's 20 largest airlines flying HEICO parts. So there aren't as many airlines potentials out there -- new airline potentials as there are selling parts to existing customers. And that is where we have a tremendous opportunity.

But yes, we are adding new customers and we are selling parts to existing customers who hadn't purchased those particular part numbers in the past.

Great. Thank you, gentlemen, and keep up the good work.

Jim Foung, Gabelli & Company.

Good morning, Larry and everyone else. Just a couple questions here. I was wondering, do you have a number for R&D this year. You indicated earlier that it's going to be higher, but I was just wondering if you had a figure in mind.

I don't think we disclosed a hard number. Typically, it runs on average around 4% to 5% of sales. That is about as specific as we've gotten.

And as Larry mentioned, we are looking at ramping up in terms of hiring some engineering positions, and so the actual number would partly depend on our success or the timing of those additional positions.

Okay. And so I could assume that it is going to be higher than last year, the R&D expenditure?

Yes, I think overall, we are budgeting an increase in dollars spent, yes.

Okay. And then Larry, I was just wondering what is your sensitivity to reduction in airline capacity? Earlier, you mentioned that you saw -- the industry capacity was down zero to 5%, and then you are looking for sales to kind of be in that kind of ballpark decline. Do you have a one-to-one correlation to the reduction in airline capacity with regards to your revenues?

No, we don't, because as I've said before, Jim, we have a headwind and a tailwind. The headwind is the airline reduction in capacity. The tailwind is the new products that we are pushing to sell. And so we can't correlate it exactly. As a matter of fact, if it weren't for the new products that we sell, I'm sure the airline capacity reductions would have resulted in bigger revenue drops.

So it is this balance of the two vectors, and we really don't know where that comes out. But we do know from experience that the more parts we have and the more parts we offer, that does get into the revenue stream eventually, and -- depending upon when the airlines approve it and when the airlines run out of their existing base stock, and that is what keeps the tailwind and it keeps the headwind from pushing us back further.

Very good. And then lastly, I recall in the last downturn when the airlines parked planes, they cannibalized the parts. So that kind of delayed the recovery in the MRO market. Do you see that repeating again in this cycle?

There will be some of that. But we don't think there is going to be the same amount, because last time, you had a relatively fuel inefficient engine, and also in the 727, you had three in the cockpit. So those inefficient -- economically inefficient planes, a lot of them were taken out of service, and they could cannibalize the aircraft and the engines.

But in this situation, they are taking them out of service. We think a lot of these planes are good aircraft and will come back into service. So we don't see as much of that kind of thing.

Okay. Very good. Thanks so much.

Arnie Ursaner, CJS Securities.

No one has asked you about acquisitions, and obviously, it has been a very important part of your long-term growth. You obviously raised a fair amount of capital with very attractive rates. We've done math that indicate if you use half of your available lines and pay multiples higher than where we probably are right now, that it would be $0.40 accretive.

Obviously you have run and have always run the Company carefully because you own a lot of shares and don't do silly things. But where are you on the acquisition front, and why wouldn't you try to take advantage of some of the -- the fact that there are very few buyers out there and you are a logical strategic player?

That is a very good question. I'm glad you asked that, Arnie. The answer is we are looking at a number of acquisitions. The problem is that some of the acquisitions that we've looked at, the seller's expectation of sale price to us becomes realistic when their earnings drop.

In this economic contraction, people start off with telling us that the earnings last year were X, and they are going to be up 20% this year. And then when you go in and do the due diligence, you find that it is very hard to support that theory. And so then we say, well, we will still proceed and we certainly have the capital to make the acquisition and we'll pay the same multiple. We don't want to get a lower multiple. But we say to the seller you have to be more realistic and you have to recognize that if you are not going to earn what you said you're going to earn, we can't pay you what we said we were going to pay you.

And then what we do is we say we will give you an earn-out. And if you really earn what you say you are going to earn, you're going to get the same thing. Well, some people don't have as much confidence to put their money where their mouth is and stand behind that statement that they are really going to earn. And so we say, well, we can't pay you.

And because, as you point out, we are disciplined and we are not going to overpay and pay silly amounts for companies that are not earning it, the deals either fall down, or in some cases, we decide that we will wait and they will wait and we will just see what happens.

So I think we are looking -- at the present time, we are looking at some very, very interesting acquisitions. They are in the due diligence process. The ones that we are still looking at do not have the attributes that I just described, because otherwise we wouldn't still be looking at them. We think there are very good opportunities out there. And if we pay fair prices and the one thing we -- as you point out, we have the capital to make acquisitions. We have no problem writing a check. So we are looking at a number of acquisitions. The pipeline is full. And at the appropriate time, we are going to make -- we try to make accretive acquisitions of good companies with good managements. And I can tell you that the companies that we are looking at and are in active due diligence all meet those criteria.

So to follow up on that, if I may, we've done work that indicates if you use 150 of your $350 million bank lines, amortization is roughly 5% of your purchase price, interest expense is LIBOR plus 5/8 -- I assume that is locked in, and you pay a five multiple of EBITDA, if you do that math, which we've done, those are 40% plus accretive. And on a full-year basis, using your entire line, it is more than double that.

So I don't know if you have any reaction to the math we have, but I assume those multiples and other factors have not changed, if you can find these.

You are 100% correct. You have done the math and the arithmetic accurately, I believe, and that is why we are looking at these companies. And I think we would like to make those acquisitions, but we are not going to make the acquisition of a foolish -- again, the problem -- the arithmetic, the math works out; making the acquisition is difficult.

It is very interesting that recently I was reading a piece that was put out by one of the accounting firms, Grant Thornton, okay? And it talks about acquisition, M&A activity. And they talk about the issues that -- the difficult issues that aerospace companies and other companies are having in finding and making acquisitions. And the problems that they point to is exactly the problems that we are running into, and it's interesting that we are not the only ones.

I can assure you that if we could spend $150 million today to make the acquisitions that you described, we would do it in a heartbeat. And maybe we will be fortunate and the things that we have on the table that we are looking at, maybe they will click. And we would like them to click.

But the key to our long-term success, Arnie, is being fiscally very responsible and conservative. I would say that at this point, HEICO, even though some people are disappointed in the market value and they are dumping the stock and panicking and running around in a tizzy because HEICO didn't earn what -- I'm not happy about that, but we have to run the business, and we are going to do it in the same disciplined way. And in my opinion, the earnings are going to shoot back up again.

And so the people that want to dump the stock and go to something else, they are going to do that. But I believe we will make our share of the acquisitions. We will maintain a very strong balance sheet in a disciplined way. A lot of companies are in hot water. A lot of companies are in real trouble. As you point out, we are paying less than 1% for our money right now, and that is because we are financially strong. And no shareholder has to worry about HEICO cutting its dividend or blowing up or some financial problem with HEICO. And that is the way we run the company.

But if we could spend the $150 million today, we would do it. And we are trying to do it. We are trying to do it.

The various names in your pipeline, and again, you probably have multiple candidates, would they be large enough to need that kind of use of capital?

I would say that the companies that -- if you take all the companies that we are looking at, yes, we could spend $150 million easily, with all the companies, the potential companies, yes.

Thank you very much.

We have no further questions at this time.

I want to thank all of you that are on this call, and remind you that if you do have any other questions about HEICO, you can give me a call or Tom or Eric or Victor, and we will try to clarify them for you.

We look forward to talking to you for the second-quarter fiscal 2009 earnings, and we hope that the overall economic conditions around the world, not only in the US, will be improving at that time. So have a good day, and thank you all for your interest in HEICO.