HEICO Corp (HEI) 2009 Q3 法說會逐字稿

Welcome to the Heico Corporation's fiscal 2009 third quarter earnings conference call. I will now turn the call over to your host, Laurans Mendelson.

Thank you and good morning to everybody on this call. We again thank you for joining us and we welcome you to Heico's third quarter fiscal '09 earnings announcement telecom. I'm Larry Mendelson. I am the CEO of Heico Corporation and I'm join here this morning by Eric Mendelson, President of Heico's Flight Support Group, Victor Mendelson, President of Heico's Electronics Technologies Group, Tom Irwin, Heico's Executive Vice President and CFO, and Joe Pallot who is our General Counsel. Before we begin, Victor, are you going to read the statement?

Sure. Good morning. Certain statements in today's conference call will constitute forward-looking statements which are subject to risks and uncertainties and contingencies.

Heico's actual results may differ materially from those expressed and/or implied by those forward-looking statements as a result of factors including, but not limited to, lower demand for commercial air travel or airline fleet changes which could cause lower demand for our goods and services, product specification costs and requirements which could cause an increase to our costs to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense space for our Homeland Security spending by US and/or foreign customers or competition from existing and new competitors which could reduce annual sales, Heico's ability to introduce new products and product pricing levels which could reduce our sales or sales flow, 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 cost and revenues, and Heico's ability to maintain effective internal controls which could adversely effect our business and the market price of our common stock.

Those listening to today's call are encouraged to do 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 statements whether as a result of new information, new events or otherwise. Thank you.

Victor, thank you. And now before reviewing our third quarter results in detail, I would like to take a few moments to summarize the highlights of our third quarter in which the continued effects of a global recession impacted both of our business sections and segments, but in which we were able to maintain customer focus and carefully manage our resources in order to keep our operating income at the level achieved in both the first and the second quarters. As you know consolidated net income was $11.1 million or four point -- I'm sorry, or $0.41 per diluted share for the third quarter of '09, compared to $12.8 million or $0.47 per diluted share in the third quarter of '08. And this was up -- the current quarter was up from $10.5 million or $0.39 per diluted share in the second quarter of '09.

July '09, we paid our 62nd consecutive semi-annual cash dividend since 1979. Our cash flow and balance sheet remain extremely strong. And as of July 31, the Company's net debt to equity was a very low 11% with net debt, which is total debt less cash, being slightly less than $50 million , $49.5 million. And of course, we have no significant debt maturities until fiscal 2013. We also completed our 39th acquisition since 1990 with the acquisition of VPT Inc. which is a leading designer and provider of innovative power conversion products, principally serving the defense, space and aviation industries. And this allowed to us further enhance our product offering and expand our market share.

Moving down into the detail, our net sales consolidated in the third quarter '09 were $134.1 million which compared to $147.3 million in the third quarter of '08 and $130.2 million in the second quarter of '09. There was a about a $4 million increase in the third quarter over the second quarter of the current year. Overall, consolidated net sales totaled $394.7 million in the first nine months of '09 and this compared to $425.6 million in the prior year.

Flight Support reported net sales of $97.2 million and $297.5 million respectively for the third quarter and the first nine months of '09 and this compared to $110 million, and $320.3 million respectively in the same periods in '08. Within Flight Support, we do continue to face challenges caused by the ongoing weak demand for passenger air travel and cargo shipments and this has forced airlines to cut capacity, reduce spending to conserve cash. This resulted in less demand for our products and services.

Electronic Technologies reported net sales of $37.1 million and $97.5 million respectively for the third quarter and first nine months of '09; as compared to $37.7 million and $105.7 million respectively in the same period in '08. Within Electronic Technologies, some strength in our defense and space business as well as the acquisition of VPT have had a positive effect on net sales, but the global economic recession has continued to result in lower overall demand including certain of our medical telecommunication and electronics products. Our net sales for the first nine months of '09 by market were comprised approximately 70% from commercial aviation, 18% from defense and space and 12% from other markets including medical, telecommunication and electronics.

Moving down to the operating income line, our consolidated operating income in the third quarter of '09 was $21.4 million, compared to $27.5 in the third quarter of '08, reflecting lower operating income from Flight Support and Electronic Technologies, partially offset by a decrease in corporate expenses. Consolidated operating income for the third quarter of '09 was comparable to consolidated operating income in both the first and the second quarters of '09. Consolidated operating income in the first nine months of '09 was $64.2 million versus $77.1 million in the first nine months of '08. Operating income of Flight Support in the third quarter of '09 was $14.8 million, compared to $20.4 million in the third quarter of '08.

Flight support to operating income in the first nine months of '09 was $46.3 million, compared to $59.7 million in the first nine months of '08. This reflects of course the lower sales volume, as well as a slightly less favorable product mix. Operating income of Electronic Technologies in the third quarter '09 was $9.9 million versus $10.8 million in the third quarter of '08, principally reflecting the lower sales volumes. Electronic Technologies operating income first nine months of '09 was $26.5 million, down slightly from $27.7 million for the first nine months of '08; reflecting improvements in operating margins due to a more favorable product mix.

Corporate expense in the third quarter '09 decreased to $3.3 million, down from $3.7 million in the third quarter of '08, and decreased to $8.6 million in the first nine months of '09 compared to $10.4 million in the first nine months of '08. We continue to focus on reductions and cost efficiencies in the areas within our control.

Operating margins of Flight Support were 15.2% in the third quarter of '09, compared to 18.5% in the third quarter of '08 and were 15.6% in the first nine months of '09 compared to 18.6% in the first nine months of '08. These decreases principally reflect the impact of lower sales volume, including a $1 million increase in the third quarter in inventory reserves for certain parts evaluated as slow-moving and a favorable product mix. Later on in this session if somebody is interested Tom Irwin can get into dig down and explain the reserve policy. This is not worthless inventory, but our policy for setting up reserves is based upon sales revenue and as a result, the numbers flow where they may. These are not obsolete parts and they will be sold in the future.

Operating margins of Electronic Technologies remain strong at 26.8% for the third quarter of '09, compared to 28.6% reported in the third quarter of '08 and further strengthened to 27.2% for the first nine months of '09, up from 26.2% in the first nine months of '08. This reflects a more favorable product mix.

Consolidated operating margin in the third quarter and the first nine months of '09 was 16% and 16.3% respectively, compared to 18.7% and 18.1% for the third quarter and first nine months of '08 respectively and remain consistent with consolidated operating margins reported in both the first and second quarters of '09. Our diluted earnings per share, as you know, was $0.41 in the third quarter of '09, compared to $0.47 in the third quarter of '08 and $0.39 in the second quarter of '09.

Diluted earnings per share was $1.22 in the first nine months of '09, compared to $1.28 for the first nine months of '08. As we reported at the end of the first and second quarters, the first nine months of '09 includes a $0.05 per diluted share benefit related to the settlement of an income tax audits in the first quarter and in the second quarter, and that was $0.04 which we reported in the first quarter and $0.01 in the second quarter. And that had been previously reported to you.

Depreciation and amortization expense were $4 million in the third quarters of both years '09 and '08. Research and development expense was $5.1 million in the third quarter '09, compared to $5.4 million in the third quarter '08. Our investment in new products and services grew to almost $15 million in the first nine months of '09 and that was a 6% increase over the same period in '08. We are completely confident that these increased expenditures will allow to us expand our lower cost product offerings and they will help to lower the cost to our airline partners and other customers while allowing to us gain additional market share.

The steady addition of new FAA PMA approvals has always been a critical element of our medium and long-term growth strategies, and we would expect that to continue. At the present time, we have over 7,000 parts approved by the FAA and we continue to target approximately 500 new PMA certifications in fiscal '09. And that's up from the 400 that we did in fiscal '08. The actual number of active parts in the product line is now over 4,000. Significant ongoing new product development efforts continue within Electronic Technologies in addition to Flight Support.

SG&A expense decreased by $2 million or 7% to $24.2 million in the third quarter of '09. This is down from $26.4 million for the third quarter of '08. This reflects lower operating cost, principally personnel related, associated with cost reduction initiatives partially offset by the operating cost of VPT which of course was acquired in May of '09. SG&A spending as a percentage of net sales was 18.2% in the third quarter '09, fairly comparable to the $17.9 in the third quarter of '08. We continue to pursue cost efficiencies and expense reductions in all of our businesses in the areas that are within our control and of course, without sacrificing our near term and long-term growth goals.

Interest expense in the third quarter of '09 decreased to only $177,000, down from $444,000 in the third quarter of '08. This was due to lower variable interest rates, partially offset by a higher weighted-average balance under our revolving credit facility. At the present time, our grid provides that we pay interest -- at the moment is under 1% per annum. Other income and expense in the third and fourth -- third quarter and the first nine months of '09 and '08 were not significant and I won't comment on them.

The Company's effective tax rate decreased to 30.4% in the third quarter of '09 and to 30.3% in the first nine months of '09, down from 35.3% for the third quarter of '08 and 34.8% in the first nine months of '08. The effective tax rate decrease in the third quarter of '09 reflects a larger income tax credit for qualified R&D activities recognized in the third quarter of '09 compared to '08, as well as a lower effective state income tax rate. The decrease in the first nine months of '09 is principally due to the previously mentioned audit settlement reached with the IRS in the first of '09, relating to the Company's qualifying R&D tax credits as well as lower effective state income tax rates.

The minority interest shares of our consolidated income was $3.8 million in the third quarter '09, compared to $4.6 million in the third quarter '08. The decrease from the third quarter of '08 is primarily attributable to the acquisition of additional equity interest in certain Flight Support subsidiaries in which minority interest exists, as well as the lower earnings of Flight Support and offset partially by the minority interest held in VPT. Tom Irwin can get into more detail if you're interested, but those are the essential elements.

Moving on to the balance sheet and cash flow. As you know, our financial position remains extremely strong. Cash flow from operating activities for the first nine months of '09 totaled $43.7 million of which $17.1 million was generated in the third quarter of '09, compared to $56.6 million for the first nine months of '08. We continue to expect full year '09 cash flow from operating activities to approximate $70 million this was comparable to the $73 million generated in fiscal '08. Working capital ratio continued to be very healthy with the ratio at 4.2 as of July 31, '09. Of course that ratio is current assets divided by current liabilities.

DSOs and receivables were 50 days as of July 31 '09, comparable to 49 days as of April 30 '09 and 52 days as of October 31 '08. We carefully managed the credit exposure by closely monitoring all receivable collection efforts. The inventory turnover rate at July 31 was 152 days, compared to 145 as of April 30 '09 and 123 days as of October 31 '08.

The inventory levels have increased since October 31 '08 as a result of lower sales volumes in '09 and the high number of new parts being developed. We are continuing to focus on managing inventory purchasing and production efforts in order to obtain optimal inventory levels. No one customer accounted for more than 10% of our net sales and our top five customers represented approximately 20% of consolidated net sales in the third quarter of '09. This percentage was about the same in 2008. Our net debt to equity was a very low 11% on July 31 '09, compared to 6% on April 30 '09, and October 31 '08. Our net debt again was a low $49.5 million as of July 31 '09.

Earlier this year, we invested over $8 million in our own shares at prices we believe provided considerable value to Heico and its shareholders. That $8 million -- we reported this in a press release, it was approximately 400,000 shares which we purchased when the stock dropped in March. We will continue to look at opportunities to invest in additional shares when the time is right . And again, as previously announced, the Board of Directors approved and authorized up to an additional one million share repurchase plan. CapEx in the first nine months of fiscal '09 was approximately $7.8 million; in line with our estimate of $10 million to $12 million in the full fiscal '09.

As for the outlook, we have been operating in an extremely tough economic climate throughout fiscal '09 to date. As we all know, the ongoing global recession has severely impacted worldwide demands for passenger air travel and cargo traffic. Airlines have continued to significantly reduce capacity and cut costs. Current market forecasts for 2009 worldwide airline capacity continue to anticipate decreases ranging from 5% to 10% relative to the 2008 levels and forecasted levels of MRO spending are down as much as 10% to 15% for overhaul and repair services and 15% to 25% for replacement parts during the same period due to capacity reduction, inventory destocking and short-term maintenance deferrals. Lower demand has also impacted certain of our Electronic Technologies businesses.

Despite these challenges, we've been able to maintain customer focus, carefully manage resources and make improvements in areas within our control. Consequently, we are pleased to note that our consolidated net sales, operating income, diluted net income per share for the third quarter of fiscal '09 were comparable to, or in fact slightly above, such amounts reported in both the first and the second quarters of the year and we anticipate some further improvement in the fourth quarter.

We remain confident of the value proposition that Heico products represent and we've maintained our steadfast emphasis on our customers by continuing the longstanding practice of developing new products and services that will ultimately increase our market penetration while maintaining the high quality of our existing products and services. We have been able to offset a substantial portion of the market decline in fact by accelerated new product development efforts and additional market penetration. We also expect to continue to focus on strategic acquisition opportunities that will complement our existing operations, such as our recent acquisition of the majority interest in VPT.

Although there are signs that airline capacity reductions have been moderating in recent months, near term visibility still remains somewhat opaque. Based on current market conditions, we are targeting full fiscal '09 sales in the range of $533 million to $538 million and diluted net income per share within the range of $1.62 to $1.65. These targets are within the range of our prior estimates and exclude the impact of additional acquisitions if any. We do expect to provide our fiscal 2010 guidance at the time of our fourth quarter earnings release which should be some time in the latter part of December.

In closing, we continue to believe that our track record of success and focus on intermediate and long-term growth provides the solid foundation to best reward Heico's and its shareholders and provides the best opportunity for a sustainable growth. That is the extent of my prepared comments and I would like our operator to now open the floor for questions. Is the

Yes, sir. (Operator Instructions). Arnie Ursaner from CJS Securities. Please proceed with your question.

Good morning.

Good morning, Arnie.

Starting with a number question, can you give us the VPT revenue contribution in the quarter?

For competitive reasons and as we spoke before, the specific revenue numbers of VPT we are not going to be disclosing. We previously indicated that it was a typical EPG acquisition which we've commented would be around $10 million to $30 million annual revenue. If you take the midpoint there, you are going to be in a range of a reasonable estimate. From that size, it's not a significant individual contribution.

And the margin on VPT similar or higher, lower than the other businesses within EPG?

It's within the overall range of what ETG operating margins have been running which you may recall typically running from a low of 25% to on a blended basis to 28% or something in that range.

And on Flight Support group, if I add in the inventory writedown -- the impact of $1 million, it would add about 100 basis points to your 15.2% reported margin. The question I have is you've bun running 17%, 18% margin for awhile in Flight Support group. It seems to be running at a lower level on a more consistent basis. How should we think about that, not just in the upcoming quarter, but perhaps as we think towards next year? How should we think about margin in Flight Support group?

This is Tom Irwin. On a near term basis, I think you're right, it does reduce line margins of the segment about 100 basis points. The near term margins have been impacted historically and in the fourth quarter by the lower volume which shrunk those operating margins as you're pointing out from 17%, 18% to the 15%, 16%. I think as we look out intermediate term and long-term, we see the opportunity to restore those margins but again, a lot has to do with the near term volume of the Flight Support group.

Arnie, this is Eric. Obviously when the spares volume falls and we continue to invest in new product development and continue our marketing and sales initiatives, we get hit badly in the margin area. I would fully expect that as -- when sales do recover that we will recover those margins.

One more for Tom if I can. On the SG&A down 7% year-over-year, how much of that should we think of as permanent reductions in SG&A and how much of that might be one-time bonus reductions?

Probably round numbers, half and half.

And question for Larry or your team, we've talked about the whole issue of customer inventories which have been rapidly depleted. You've been building up in anticipation of some change in that. Based on your conversations with your leading customers, where do you think we are in the sell-in sell-through if you will of customer inventories? Are they depleted enough and when there's any pick-up in them, you are like to the see a fairly rapid pick-up in your business.

Arnie, this is Eric. From our discussions with customers, customers are holding the smallest amounts of inventory that we have ever seen. And they -- many customers, many major airlines are literally living hand to mouth. There's just no inventory out there whatsoever. When there is a pick up in demand, I believe they are going to be caught very short.

One is for that pick-up in demand. Two, I think their maintenance people are going to realize that they need to restock and the need to uphold appropriate safety stock which is not what is going on right now. I think they are down at the bottom where they can possibly operate and again, deferring everything they possibly can, whether it's a shot business on engines or even doing component maintenance, they are conserving every dollar of cash they possibly can.

We think that the destocking has run its course. When there's a recovery, they are going to have to buy, not only for that recovery, but also replenish their safety stock.

Thank you very much.

You're welcome.

Your next question is from Tyler Hojo from Sidoti & Company. Please proceed with your question.

Good morning, everybody.

Good morning, Tyler.

I was hoping that maybe you could -- maybe comment a little bit just in regards to how the penetration story is going in terms of winning new customers, breaking in a little bit more to that second tier airline customer and maybe just a follow on to that. I think it's been a little bit since you guys have commented on how the relationship with British is going and as well CASG -- CASGC.

Tyler, this is Eric. As you know, the customer relationships are incredibly strong. As I said for the last number of conference calls, that customer interest has never been stronger and that customers with whom we haven't dealt before, let's say the non 20 largest customers in the non 20 largest airlines in the world as well as other departments within the airline with which we typically didn't sell those different kinds of parts to. There's tremendous amount of interest. The airlines need to save money, need to cut their costs. We are a recognized strategy to be able to do so and the momentum and the support at these customers has never been higher.

And how about the British relationship and CASGC?

Again for competitive reasons, our competitors are on this call so we say hello to all of them. For that reason -- and we wish them good morning, and for that reason we cannot respond on specific customers. Also, our customers don't want to us specifically comment on their business with us. But I can say that in general, our customer initiatives have been extremely successful.

Okay. And just to follow on to Arnie's question, in terms of inventory destocking and deferred maintenance. It's not one of your direct competitors, but an after-market player was out earlier in the week, saying basically they saw another leg down in terms of some of these issues in August. It seems like it's more of a used part issue as opposed to new, but can you guys definitively say that you guys are not seeing that leg down on the PMA side?

I would say, through July, I'm not sure that we can comment post -- it's not even a month end. But I can tell you through July, I would say things were consistent with how they've been over the last six months. We have not seen a significant step down through July. I would say it includes from -- the results -- the numbers are weak and we've been operating at this level for awhile.

I don't know if other suppliers may have had one-time deals which kept prior periods stronger. I can't comment on that. But for us, we've pretty much have been operating at this level for say, roughly the last six months and it's been pretty consistent. We are not seeing any significant up or down.

Tyler, I've been saying and I think I said on the last call, we think we are bumping along the bottom. We at this point, unless they put many more aircraft out of service, we don't think we are going to see another leg down. Eric indicated that inventories at airlines are at the lowest level that he's ever seen. I think we are bumping along the bottom. I don't think we've seen any big movement up yet. But when they start to put a few more planes in service, we think that there's going to be a pent up demand for parts.

This is just my business guess, having been in this business now 18, 20 years, this has happened many times before. And in my mind, I don't want to be the eternal optimist, but it's only a question would of when it happens. Does it happen next month, September, November; I can't tell you because I don't know. But if you read in the newspaper -- that they pulled another 10% out of the fleet, our business is going to get weaker. But in my opinion, that's unlikely. If it does appear, we've bottomed and I personally think the next step will be a leg up, but I can't tell you when.

Fantastic. Thanks for that.

Your next question is from Mickey Schleien from Ladenburg. Please proceed with your question.

Hi, Larry. It's Mickey Schleien with Ladenburg. Good morning.

Good morning, Mickey.

Most of my questions have been answered already, but I did want to better understand the inventory writedown because I was under the impression that most of your inventory never technically becomes obsolete. Why would you write it down? And I just want to confirm that it was about a $0.03 per share hit and will it reverse in the future?

The answer, I'll explain it as best I can and then for more color, Tom Irwin can give you the detail. We base our inventory reserve on sales of parts over a past period of time, whether it's 12, 24, 36 months depending upon the product and the company and so forth. When sales slow down -- let's say you have a 20% drop in sales of a particular part over that base period, well, we would then calculate what the -- what our live inventory should be, based upon the number of parts we sold over the past 12, 24, 36 months.

And if sales are going down, any excess inventory we would set up a reserve for. That inventory, as you pointed out, is not obsolete. It's fully salable. It's one of these accounting conventions that the accountants require. We think if they vary conservative -- we have always had an extremely conservative inventory policy, probably too conservative. But yes, as sales increase, what you hinted at we believe will happen that the inventory reserve will be relieved and -- because there will be more sales and that size reserve won't be necessary so that will flow back into income. That's what will happen.

The problem is that there are some companies, particularly parts companies -- companies that sold used parts that had very liberal inventory reserves and basically said they could have 10, 20 years inventory on the shelf and they wouldn't reserve it. And their financial statements in our opinion were inflated -- that they weren't giving an accurate. We went the other way. We said we want to be absolutely conservative and not project that we have anything more than we do have. And that's resulted in us being penalized lived in times like this, but -- we are a conservative company. Everything we do -- we account conservatively. Cash flow is conservative. Debt is conservative and that's just the policy that we picked.

Was this amount charged to cost of sales in Flight Support group?

Yes, Mickey. This is Tom Irwin and that is correct. The $1 million charge to Flight Support group cost of sales, just one comment. Because of the minority interest in Flight Support group the impact at EPS level is about $0.02, not $0.03 and that's -- after taxes, after minority interest it's about $0.02. But other than that, Larry described it perfectly. Obviously, we'll all know he's a CPA and he understands it. I don't have any further description, again except to emphasize that this is not obsolete inventory. This is slow-moving inventory and we provide a provision, as Larry mentioned, that we may have to carry it longer and therefore, we write it down and reserve portions of it. To the extent sales recover and we believe long-term they will, then we would expect in the normal course that the charge would reverse.

My next question is related to Southwest Airlines. They were in the news a couple of days ago I believe, regarding possibly installing inappropriate parts on their planes. Does that open any windows for you or provide you any opportunities?

We are not familiar with that specific situation and so therefore, I'd rather not comment on it because I really don't have specifics. But in general, yes, I mean all of our parts are fully FAA approved. I don't know if these parts were made as part of a repair and maybe some of the documentation wasn't finalized. I just don't know. I read the same stuff that everybody else has. But, yes, I think that it could possibly be an opportunity. But at this point with what's been in the press, I don't see it as a major issue for Southwest or really major opportunities for us.

Just a couple quick modeling questions and I'll let someone else take a turn. What's the outlook for the tax rate? And can we expect any significant earn outs , either cash or stock to be paid in the next few

Mickey, this is Tom Irwin. With respect to taxes, we do expect the tax rate would increase last year and for the full year about 34.5%. In our second quarter conference call we commented that we thought it would increase to about that level which is still the case. In the third quarter, we wound up qualifying for additional R&D tax credits upon completion of our tax credit study so that helped the third quarter. But we do expect it in the fourth quarter to go back into that 34%, 35% range and out in the intermediate term something approximately in that range as well.

And burn? Any potential for earn out payments to your minority shareholders, either cash or stock?

In terms of earn out payments on near term, we don't expect any of that, at least for the end of this year. Typically those earn outs are computed at the end of the year, but paid into the next fiscal year. We don't expect any, at this moment, unusual cash requirements related to acquisitions or acquisitions of minority interest.

And you treat those as purchase price adjustments?

That is correct. Yes.

Thanks for your time.

Thank you.

Your next question is from Chris Donaghey from Suntrust Robinson. Please proceed with your question.

Good morning, guys. Larry and Eric, just now that you're up to 500 parts a year, can you talk about maybe where you are year-to-date with that level? As you go into the next fiscal year, are you comfortable that that new rate is something that you are going to sustain? Or are you thinking about increasing or reducing that number based on market conditions?

I'll answer it overall at 30,000 feet and then Eric can do it. We are convinced that we can do 500. We probably could do 800. But the key is to get them approved and processed and sold at the airlines. We have not completed the budget for the next fiscal year 2010 and until we complete that budget, we are not going to know exactly -- are we going to do 500, 600, 700. I feel pretty confident that we will be doing at least 500. If it turns out that the marketing people can get these approved at airlines and do 600 or 700, we definitely have the capacity to do that.

The most difficult thing, as I think I've told everybody who's familiar with Heico, is the marketing to get airlines to approve the parts to put them into the system. We are expert in developing parts. We have very high quality, as you know I think you've seen it, the technical capability to do these parts and very advanced methods. The airlines are tight with personnel. They're big. They are bureaucratic and it's difficult to get them to promptly approve parts. The answer is as the future goes, we don't know. We haven't set the budget yet, but I'm sure there will be at least 500.

And, Chris, to answer your question about where we are in the development, we are at the same place pretty much that we've been running at historically at this time of the year. There's no reason why we shouldn't be able to develop those parts. We say that it's 400 to 500 parts or closer to 500 parts. Next year, based preliminarily on the numbers, there will be at least 500 parts.

Okay. And so obviously with -- there's an incremental 100 parts that were added to the plan for fiscal 2009 so presumably the 400 is -- been the steady state run rate. Of the 100 or so new parts, have any of those -- of that incremental volume been approved by airlines or would you consider that really more of a 2010 impact? I'm just trying to gauge the relative lag of when the actual parts increase starts to show up in the Flight Support group.

Normally the lag is -- we sell very little of what have we develop in that year actually -- in the year that's been certified. Most of it comes in the -- spaced out probably over the next three years. Say at day zero, we get the approval and then we would typically sell maybe about one-third of the potential in year one, two-thirds in year two and close to three thirds in year three. If you want to simplify it. It's not -- those aren't exact numbers, but it gives you an idea of how long the process takes.

Okay. Great. Thanks. Larry, just quickly, the balance sheet continues to be very, very clean. Just thoughts on the pace of acquisitions, the volume of acquisitions, what are you seeing from a multiple standpoint there?

The pace is probably normal. We have a number of acquisition possibilities that we are doing due diligence on. Recently, we had a very good candidate and somebody paid significantly more than we offered. I think we were the next in line. But somebody -- a foreign buyer reached up and just paid a huge number that we are too disciplined to pay. It could come back to us. If that deal falls out, it might come back.

I think we have some other transactions that look very likely to close. But as you know, until you are at the closing table and the documents are signed and the money is transferred, they are not closed. But I think there are some very good opportunities that we are looking at and I would expect in the fourth quarter that there should be some announcement of -- again, we do singles and doubles. I don't think anything we are going to announce is going to be an eye pie. Use an example, Ipod great event that's going to knock everybody's hats off, but it's going to be a good solid addition and keeping in line with the kinds of acquisitions that we've made over the years. And there are a number of others that we are looking at and doing due diligence.

Okay. Great. Thanks, Larry.

Your next question is from Steve Levenson with Stifel. Please proceed with your question.

Thank you. Good morning, everybody. You talked about some personnel cuts or reducing SG&A, are those things that are going to stick or do you see yourself fired more as the business turns?

This is Tom Irwin. I think we commented previously -- we put a basic hiring freeze earlier that this year in terms of vacant positions and did some selective workforce reductions and so on and so forth. It was largely driven by the fall off in sales demand that we saw and predicted on the near term. I think from a business perspective, we all believe that it will recover. We think we are in strong industries. Yes, I think eventually those positions will need to be refilled, but I think in terms of operating margins and so on and so forth, as we commented earlier that the margins are going to improve. They are not going to stay at this level. That was more of a volume reduction impact as opposed to the staffing.

Got it. Thank you for the reinforcement. From your experience, can you give us some color on what you think we are going to see as we enter recovery? It seems like the global fleet has gone up. That's mostly from new aircraft. How do things work for you as we go into this recovery? What comes out? When do you start to see things lag or lack of lag?

This is Eric. I think two things are going to happen. One is some of the aircraft that have been put down are going to come back. Obviously, the newest aircraft that are down on the ground are going to come back first and we have considerable content on those aircraft. (multiple speakers)

Then of course as you point out, new aircraft will continue to be delivered and we have significant content on aircraft that are continuing to be delivered. We should get -- we will be helped twos ways. And of course, the third quarter is you've got the fleet out there which continues to operate. From what we see, the supply chain has been deleted. They've been running this equipment very hard and that's going to have to be brought up to the standard that they typically have operated in the past so there will be this pent up demand. That's where we really see -- how we see the recovery impacting Heico.

Thanks. Last item as far as raw materials prices go, what have you seen as a trend recently?

Raw material prices had been down. Some of them are starting to come back now. And we just see basically the same thing that everybody else sees out there.

Great. Thank you very much.

Thank you.

Your next question is from Eric Hugel from Stephens, Inc. Please proceed with your question.

Good morning, guys.

Good morning,.

Just trying to get a feel in terms of your level of -- maybe going back to Tyler's question about one of your competitors talking about August really hit ago wall here. How quickly do you guys get visibility about changes in sales trends that you would know about if you saw a pretty significant change in demand? I am assuming would you know about it pretty quickly.

Yes. We would hear about it pretty quickly. And I think that the those news reports would come out and everybody would hear about them pretty quickly. I don't think that we would have significant knowledge in advance in our business line of demands coming back. Once airlines decide they are going to put new equipment back, they could wait to talk about it and it ends up in the press and we all pretty much see it at the same time.

In terms of people hitting a wall, I would say the -- from other industry people with whom I've spoken, we've all been affected similarly and volumes are down. I would say to the extent that some people haven't been impacted up to now may just mean that they had -- they have done a very good job and got a whole bunch of contracts and were delivering on backlog and really had some unique things as opposed to what was going on in the industry. I wouldn't characterize the industry at all as hitting a wall now. I think it's really -- we've been operating at this level for six months. If some businesses haven't seen it until now, it could have just been because of orders and things they had in the pipeline that were -- that really prevented the numbers from turning down when the whole industry turned down.

Fair enough.

They probably did a very good job holding the business at those levels as opposed to the industry which saw more suffering.

Okay. Your corporate expense, if you look at -- the first and second quarter was around 2.6, 2.7. It stepped up a bit in the third quarter. Is there anything in there that was one time-ish and that's going to come back down to that 1Q level? Or how should we think about that for the quarter and maybe going forward, what run rate should we be thinking?

It's Tom Irwin. It is up. The corporate expense is up, relative to the first and second quarters. Part of that is offset by some investment income and retirement plan expense, probably a couple hundred thousand compared to the second quarter. That didn't increase the net -- it didn't decrease the net bottomline or EPS.

Our corporate expense other than that was up a bit and is mostly related to compliance and seasonal stuff that is ramping up, in terms of like 404 compliance, a lot of work we've done in the third quarter getting ready for the external auditors in the fourth quarter and things like that. The answer is based on that seasonality, much of that is being behind us as we go into the fourth quarter and as we would expect it to come down a bit in the fourth quarter. Overall it is down still significantly from last year, but almost like a seasonal impact.

Great. Should we still be thinking about in terms of -- we always talk about minority interest and taxes at around that 50% rate. Is that still a good way to think about it?

Yes, exactly. And again, through this year -- through the third quarter, it was down about 48% when you combine it but again, we had the R&D tax credit savings. But on a go forward basis, yes. I have seen changes if we were to acquire additional equity interest and so forth. But near term, yes, in that 50% range.

And my last question, with regards to your talking about trying to get the airlines on board maybe to approve more than 500 parts, the question is at times like this when airlines are laying off people and conserving everything that they can, does that attitude impact even their desire to make any internal investments in order to ramp up adoption of these longer term cost savings? But again, these guys are living day-to-day, trying to save cash costs and all that stuff for tomorrow. Is that having an impact on your ability to get them to ramp up part approvals?

They are in a financial bind so they want to take advantage of the savings? We have seen a number of airlines invest additional dollars into approval of parts and try to reorganize their processes to accelerate approval. Yes, I would say in general this has been a time where there's been more emphasis put on savings and quicker adoption than historically we've seen in the past. Unfortunately, when volumes are down, volumes are down and if they are told not to spend a penny if they don't have to, you don't get the sale. But I'm confident that that will turnaround.

Okay. Thanks a lot, guys.

Thank you.

We still have two questions in queue. Your next question is from Jim Foung from Gabelli and Company. Please proceed with your question.

Good morning.

Good morning, Jim.

A great quarter, Larry, and your team. Just one question, just on Electronic Technologies. The bulk of that business is in defense and space, just wondering what's your outlook there? Are you worried about the Obama administration cutting some of the budgets for that area? That is the lions part of that segment and your margins held up quite nicely as a result of that segment of the business. Could you give us some outlook, where you see that going from here on?

Sure, Jim. This is Victor. The answer is that we are watching what's going on with the defense budget as closely as we can. We don't really have any special information that other people don't have. But if you look within the group, we have a pretty diverse base of business that's not contingent for the most part on any individual program.

We've tried to have this breath which you've heard me talk about quite a bit. We have a fair amount of earnings that come from the commercial satellite market, for example. We have some that come from the defense satellite end of the market. But our components and subcomponents are generally geared toward, as Secretary Gates would say, the 75% solutions versus the 99% solutions.

We believe that on the programs going forward and on the need going forward, we are more on those meat and potato programs that we think are more likely to get funded and that people tell us are more likely to get funded. Of course, as you know for example we acquired VPT back in May after the administration had talked about its defense plans and what they wanted. They made clear what they wanted to do cut and you can see we went through with that acquisition which we've been working on for some months so you can imagine we felt very comfortable with where they were in the total mix of business.

Some other things happening for us. Right now, we are feeling the pain in the medical end market. A lot of -- in the diagnostic imaging and laser surgery and dentistry and so on markets where our subcomponents are used in the larger systems, those sales are down dramatically, much more than we've seen in anything in commercial aviation -- a buy a factor of more than two. From what we understand from the large equipment manufacturers, we just -- a lot of people are -- a lot of hospitals and providers have put the breaks on buying equipment as they watch to see things get sorted out.

In the interim, we've won some new contracts and some new business. I believe and I can't be certain of it, but I believe that as time passes we have a lot of upside in that part of the business. And that the overall balance between the large programs where we do have some exposure that are being funded at a lower rate or not being funded at all, hopefully should be offset by some of these other factors.

Could you give us an idea of how large this medical business is for you? That that's where you are feeling the pain right now, the medical, telecommunications, electronics group?

Not so much telecom, but I think if you were to look within the Electronic Technologies group, you would probably would find that from medical markets overall we've probably -- somewhere in the range, it's shrunk but some where in the range of 20% of our revenue probably from those markets. For the group, again, it's a series of building blocks. We've got the commercial satellite end markets. We've got the defense satellite end markets. We have the Homeland Security end markets. We've got the medical and so on. And then you've got varying profit margins within there and varying fixed costs. Somewhere around that range, 20% or so.

Okay. Great. And just swing back to again the defense and space, those are typically long lead time programs. You have pretty good visibility going out six to 12 months in terms of the vitality of these programs, notwithstanding the timing of the shipments which sometimes fuse the quarter. From where you stand today, your visibility looks pretty good when you go out in the next 12 to 24 months on these programs that you are on?

I would say so. Yes, overall. There are some things that are somewhat opaque. And there are times when the government is planning to purchase something and they don't. They suddenly run out of funding. They move it somewhere else and it gets delayed, pushes out to the right or even disappears. Overall, so far the visibility is holding decently over the next year or so.

Okay. Great. Thanks very much.

Thank you.

Your next question is from [Ryan Rackley] from Raymond James. Please proceed with your question.

Good morning, guys.

Good morning.

Could you quickly just talk about what you are seeing on geographical basis? Mainly, are you seeing any discrepancy between domestic and international customers? Is there any reason we should expect one to recover ahead of the others?

This is Eric. I will answer that for our Flight Support business. We felt that roughly ten, 15 years ago, around three quarters of our parts businesses was North American-based. And now less than half is North American-based.

We've experienced a tremendous adoption of abroad throughout the rest of the world and we see that trend continuing. We are working all sorts of projects now for people around the world. We assume we didn't work on these other kinds of products and I think that there is going to be a tremendous non US demand for what we are doing, far in excess of anything that we've seen in the past. We continue to work with the US carriers and we are doing very well there as well, but internationally there is a huge amount of interest and support.

As a matter of fact, I reviewed with our new product development folks a couple of days ago the work in process reduction reports. We've got just a huge amount of stuff that they are working on and analyzing for airlines, many of whom outside of the United States. I think that the recovery is going to be particularly strong there.

Great. Thanks. Lastly looking at your guidance, are you -- does your guidance reflect the typical seasonal MRO strength that you guys have seen in the past?

I'm sorry, I'm not following your question.

In the past, if I remember correctly, you've seen seasonal strength in your MRO business in the back end of the year. Is that something that your guidance reflects now?

Generally our fourth quarter finishes pretty strong. Some of that's in the electronics group. But if you look back from a longer period of time, there's been parts and catch up on some lumpiness, deferrals. Generally coming out of the summer travel, MRO service revenues are up. That's a normal time. The answer is our guidance considers everything we see and know at this point and give it our best shot. It does reflect that usually, as Larry mentioned, we do see some improvement baked into our fourth quarter estimate and hopefully that will come about.

Over in the Flight Support side, you're right, historically the fourth quarter has been pretty strong. But again, we've spoken with all our folks. We have all those numbers really baked into the estimates that we provided.

Got it. Great. Thank you, guys.

Thank you.

There are no further questions in queue.

If there are no further questions, we look forward to speaking to you on the next call which will be in the latter part of December when we talk about the fourth quarter and the full year and give some guidance as to fiscal 2010. In the interim if you have any questions that we can help you with, please give us a call. We are all available and we will try to be responsive to your inquiry. Enjoy the rest of your summer and Labor Day and we look forward to speaking to you in the near future. And thanks so much.

This concludes today's call. You may now disconnect.