HEICO Corp (HEI) 2009 Q4 法說會逐字稿

Good morning. Welcome to the HEICO Corporation fiscal 2009 fourth quarter and full year results conference call. At this time, I will turn the call over to Mr. Larry Mendelson.

Thank you, and good morning to everyone on the call. We thank you for joining us, and we welcome you to this HEICO fourth quarter and full fiscal '09 earnings announcement teleconference.

I'm Larry Mendelson, CEO of HEICO Corporation. I'm joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-President and 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. Certain statements in today's conference call will constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed 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, the complete contracts, government and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by US and our foreign customers, or competition from existing and new customers, 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, medical, telecommunication and electronic industries, which could negatively impact our costs from revenues; and HEICO's ability to maintain effective internal controls, which could adversely affect our business and the market price of our common stock.

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

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

Despite the continued affect of the global recession, in the fourth quarter, our net sales, operating income and net income improved over each of the first three quarters of fiscal '09.

Demand for our Flight Supports product and services continue to be pressured by airline capacity reductions and short-term maintenance deferrals. Although our Flight Support Group sales were down 9% in fiscal '09, AeroStrategy Management Consulting estimates that aftermarket parts suppliers and independent MRO service providers would see a 15% to 30% reduction in calendar '09 revenues. So we believe that our Flight Support Group has performed extremely well under these very difficult conditions.

Again, I emphasize we were down sales 9%; AeroStrategy was guesstimating 15% to 30% down for the general market.

Electronic Technologies reported record net sales and operating income for the fourth quarter, and record operating income for the full fiscal '09, which saw some strength in our space and defense-related businesses, and also benefited from a mid-year acquisition.

Our cash flow and balance sheet remains strong. Cash flow from operating activities was $76 million for fiscal '09, representing 170% of net income, and this was up from $73 million in the prior year. As of October 31, the Company's net debt to equity ratio was a very low 11% and we have no significant debt maturities before 2013.

We completed our 40th acquisition since 1990, with the acquisition of the Seacom division of privately-held Dukane Corporation. Dukane Seacom is the world's largest designer and manufacturer of underwater locator beacons used to locate aircraft, cockpit voice recorders, light data recorders, marine ship voyage recorders, and various other devices, which have been submerged underwater.

Several of our subsidiaries recently received noteworthy press coverage. Examples include VPT, which is an innovative leader in providing power-handling products, introduced a new power series -- supply series designed for rugged avionics and military applications.

Our Leader Tech subsidiary, a world leading innovator and manufacturer of EMI shielding products, released a new line of RF shielding ventilation panels for the OEM electronics markets. Analog Modules, a leading producer of laser rangefinder receivers for the US military market, won the prestigious three-star Supplier Excellence Award by Raytheon Space and Airborne Systems.

These accomplishments exemplify the commitment of all of our subsidiaries to broaden their product offering, expand their customer base, and achieve significant sales and profit growth. Also during fiscal '09, we increased our semi-annual cash dividend by 20%. For the fourth consecutive year, HEICO was named as one of the 200 Best Small Companies by Forbes magazine.

During the year, Eric and Victor Mendelson were each named Co-Presidents of HEICO Corporation, and those titles reflect the roles that they have effectively occupied at HEICO for many years.

Going into the specific line items of our financial statements, in consolidated net sales in the fourth quarter of '09 were $143.6 million compared to $156.7 million in the fourth quarter of '08, and up from $134.1 million in the third quarter '09.

Consolidated net sales totaled $538.3 million for the full fiscal '09 compared to $582.3 million in the prior year. The net sales decline experienced in '09 reflects the continued global recession.

Net sales of Flight Support were $97.9 million and $395.4 million, respectively, for the fourth quarter and the full fiscal '09, as compared to $116.5 million and $436.8 million, respectively, for the same periods in '08.

Net sales of Electronic Technologies were a record $45.8 million in the fourth quarter of '09, up 14% from the $40.3 million in the fourth quarter of the prior year. Electronic Technologies net sales in full fiscal '09 decreased slightly to $143.4 million from $146.0 million in the full fiscal '08.

Some strength in certain of our electronic technologies groups' space and defense businesses, as well as a mid-year acquisition, had a positive effect on net sales; but the global economic recession has continued to result in reduced customer demand in certain of its medical, telecommunication and electronic products.

Our net sales for the full fiscal '09 by market were comprised approximately 68% from commercial aviation versus 69% in '08; 20% from defense and space versus 16% in '08; and 12% from other markets, including medical, telecommunication and electronics versus 15% in '08.

Our consolidated operating income in the fourth quarter of '09 totaled $24.1 million compared to $28.7 million in the fourth quarter of '08 as a result of lower operating income from Flight Support, partially offset by higher operating income from Electronic Technologies, as well as a decrease in corporate expenses.

Consolidated operating income for the fourth quarter of '09 was higher than consolidated operating income in the first, second and third quarters of '09. Consolidated operating income for the full fiscal '09 was $88.3 million versus $105.8 million in full fiscal '08.

Operating income of Flight Support in the fourth quarter of '09 was $13.7 million compared to $21.5 million in the fourth quarter of '08. Flight Support's operating income in the full fiscal '09 was $60 million versus $81.2 million in full fiscal '08. These decreases reflect the lower sales volume and less favorable product mixes.

Electronic Technologies reported record operating income in the fourth quarter and full fiscal '09. Operating income of Electronic Technologies was $13.5 million in the fourth quarter '09, up 22% from the $11 million in the fourth quarter of '08. Electronic Technologies operating income for full fiscal '09 increased to $40 million, up from $38.8 million in full fiscal '08. These increases reflect an increase in operating margins, resulting principally from a favorable product mix and the mid-year acquisition, which I referred to earlier.

Corporate expense in the fourth quarter of '09 decreased 18% to $3.1 million, down from $3.8 million in the fourth quarter of '08, and decreased to 17% -- and decreased 17% to $11.7 million in the full fiscal '09, which is down from 14.2% in full fiscal '08. We continue to be focused on controlling general corporate expenses.

The operating margins of Flight Support were 14% in the fourth quarter of '09 compared to 18.4% in the fourth quarter of '08, and were 15.2% in full fiscal '09 compared to 18.6% in fiscal '08. The decreases principally reflect the impact of lower sales volumes on fixed manufacturing costs as well as a less favorable product mix. We do expect to see Flight Support margins improve as commercial aviation markets recover and our sales increase.

Operating margins of ETG grew to a strong 29.4% in the fourth quarter '09 compared to 27.4% in the fourth quarter of '08. They strengthened to 27.9% in the full fiscal '09, up from 26.6% in the full fiscal '08. This reflects a favorable product mix.

Consolidated operating margin in the fourth quarter of fiscal '09 was 16.8% and 16.4%, respectively, compared to 18.3% and 18.2% for the fourth quarter and full fiscal '08, respectively. Our fourth quarter consolidated operating margin was higher than the consolidated operating margins reported in each of the first three fiscal quarters of '09.

Diluted earnings per share was $0.43 in the fourth quarter of '09 compared to $0.50 in the fourth quarter '08, and $0.41 in the third quarter of '09. Diluted earnings per share was $1.65 in the full fiscal '09 compared to $1.78 in the fiscal '08. The full fiscal '09 earnings do include a $0.05 per diluted share benefit relating to a settlement of an income tax audit in the first quarter of '09.

Depreciation and amortization expenses in fiscal '09 were comparable to those reported in '08 -- about $4 million and $15 million in the fourth quarter and full fiscal '09 versus $3.7 million and $15 million in the fourth quarter and full fiscal '08.

R&D spending was $5 million in the fourth quarter of '09, up from $4.6 million in the fourth quarter of '08. For the full fiscal '09, we invested approximately $20 million in the development of new products and services, which represents an increase of 7% from the same period in '08. I want to remind you that all of our R&D are treated as period costs. They're written off completely, so any increase does hit the bottom line. We feel, of course, it will benefit future operations.

We are budgeting $22 million in R&D spending in fiscal '10, approximately a 10% increase over '09, which reinforces our commitment to develop new products and services. We continue to develop 450 to 500 new PMA certifications per year, and we now have over 5,000 FAA-approved parts, which we offer to our customers.

Significant ongoing new product development efforts continue within both Electronic Technologies and Flight Support. Again, as I have said many times before, the continued development of new products and services to meet the needs of our customers is a fundamental element of our strategy for sustainable growth.

We increase R&D for the future benefit of the Company, and we ignore the impact that increases might have on the short-term results of the Company. We look for the medium-term and the long-term growth of HEICO. That -- if I remind you -- that strategy has paid off very well in the last 19 years by having a compound annual bottom-line growth of about 20% -- compound annual growth of 20%. So, we think the strategy is a strong one.

SG&A expenses decreased by $4 million or 14% to $24.7 million in the fourth quarter of '09, down from 28.7% in the fourth quarter of '08, and they decreased 11% to $92.3 million for the full fiscal '09, down from $104.7 million in fiscal '08. The decreases reflect lower operating costs, principally personnel-related, associated with cost reduction initiatives, as well as the decline in net sales.

SG&A expense as a percentage of net sales declined to 17.2% for the fourth quarter and full fiscal '09, and this was an improvement from the 18.3% and 18% in the fourth quarter and full fiscal '08, respectively. We attribute these decreases to our pursuit of cost efficiencies and expense reductions in all of our businesses, especially in the areas that are within our control without sacrificing our near-term and longer-term growth goals.

Interest expense in the fourth quarter of '09 decreased to a de minimus $131,000, down from $363,000 in the fourth quarter of '08. This is principally due to a lower variable interest rate under our revolving credit facility. At this time, I believe our interest rate is 1% or slightly less on an annual basis. Is that right, Tom? (multiple speakers)

Other income and expense were not significant. I won't comment on them. I will comment on the income tax rate. The Company's effective tax rate was 36.2% in the fourth quarter of '09, and 31.9% in the full fiscal '09, compared to 33.7% in the fourth quarter of '08 and 34.5% in the full fiscal '08. The 2.6% decrease in the full year effective tax rate is principally due to the audit settlement reached with the IRS in the first quarter of '09 relating to the Company's qualified R&D tax credit.

The minority interest shares of our consolidated income was $3.6 million in the fourth quarter of '09 compared to $4.9 million in the fourth quarter of '08. The decrease from the fourth 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 lower earnings of Flight Support, partially offset by the minority interest held in a mid-year acquired business within Electronic Technologies.

Moving now to the balance sheet and cash flow. Our -- as you all know, our financial position remains extremely strong. This is a basic strategy, management strategy that we utilize and that's how we run this Company.

Our cash flow from operating activities was a very strong $32.1 million in the fourth quarter of '09, bringing the total full year '09 to a record $75.8 million, which was up from $73.2 million in '08 and in '09, it equaled 170% of net income. In fiscal '08, cash flow from operating activities was 151% of net income. So, on lower reported net income, we actually reported higher cash flow from operating activities.

Our working capital ratio, which is current assets divided by current liabilities, of course, is a healthy 3.7 times as of October 31, '09, and this is up from 3.1 as of October '08. DSOs of accounts receivable were 50 days as of October 31, '09 -- an improvement from the 52 days in October 31, '08.

We manage our credit exposure by closely monitoring all receivable collection efforts. As some of you know, we have committees devoted throughout the Company to focus on receivables, collection and credit extensions.

Inventory turnover rate in October 31, '09 was 133 days compared to 123 days as of October 31, '08. This reflects the decrease in net sales and the higher number of new parts being developed. 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 full fiscal '09, compared to 21% in full fiscal '08.

Our net debt to equity was, again, a low 11% as of October 31, '09 compared to 8% in October 31, '08, and our debt -- net debt -- was a low $48.3 million on October 31, '09. CapEx in full fiscal '09 were $10.3 million and pretty much in line with previous expectations.

Now the outlook. As you know, we operated in an extremely tough economic environment throughout fiscal '09. The continued global recession has severely impacted worldwide demand for passenger air travel and cargo traffic. The airlines responded by reducing capacity, inventory destocking, and short-term maintenance deferral. The recession also resulted in lower demand for certain of our Electronic Technologies products.

Fortunately, we are starting to seep some early signs that the impact of the global recession may be moderate. Despite these challenges, we have been able to maintain customer focus, carefully manage resources, and make improvements in the areas within our control.

We are extremely pleased to note that our consolidated net sales, operating income and net income improved in the fourth quarter of fiscal '09, compared to such amounts reported in each of the first three quarters of the year. So, the sun seems to be coming out from behind the clouds, albeit slowly.

As we look forward to fiscal '10, we expect continued softness during the first half of calendar '10 in our commercial aviation markets, which represent about 68% of our sales. While the consensus opinion within the industry expects a recovery within the airline industry in 2010, the strength and exact timing of that recovery is uncertain at this time, in our opinion.

Based on this and conditions within our other major markets, we are targeting 2010 growth of 5% to 8% in net sales and earnings, or within a range of $565 million to $580 million for net sales, and $1.74 to $1.79 for net income per diluted share. These targets exclude the impact of any potential acquisition opportunities and could increase with a stronger or more rapid recovery in the airline industry.

The increase in net sales is expected to result in full-year consolidated operating margins improving to about 17%. Fiscal 2010 cash flow provided by operating activities is expected to remain strong and approximate $75 million to $80 million. CapEx in fiscal '10 are expected to be $12 million to $15 million.

Our strong cash flow and balance sheet will continue to allow us to take advantage of attractive acquisition opportunities, if they arise, such as our successful acquisitions in '09 of a majority interest in VPT and of the Seacom product line. Our focus on strategic acquisition opportunities within both Flight Support and Electronic Technologies that complement our existing operations is an important element of our growth strategy.

In closing, we continue to believe our emphasis on intermediate and longer-term growth, with a strong commitment to development of new products and services that meet the needs of our customers, is a solid foundation to best reward HEICO and its shareholders, and to provide the best opportunity for sustainable growth.

One other comment. Looking forward, we would expect our growth to run at organic and acquired roughly 50/50, possibly 60/40, similar to the past; but I would say 50/50 is probably a good guesstimate. With that, is the end of my prepared comments and I would like to ask Nicki, our operator, to open the floor for questions.

(Operator Instructions). Tyler Hojo.

How many PMA parts did you develop during the fiscal year?

Eric?

Approximately -- consistent with what we've done in the past, approximately 450 PMA parts. There is some additional ones, actually, so the technical number is higher than that; but 450 would be a good number.

So, just in terms of contemplating the R&D increase -- the 10% R&D increase year-on-year, I guess you said 450 to 550. Would the higher end of that range get you to the 10% increase?

Well, wait, we didn't say the number; we said a 10% increase in dollars from $20 million to $22 million. I don't know if that's -- if we can say that that's going to -- I mean, sometimes the complexity of the part may require an increase, and the projected revenue from a part might increase the dollar cost, but not the sheer number of parts. So there's a little disconnect there.

I see. Okay. All right, very good. I guess just one other question and I'll hop back in the queue. Maybe you could just talk about the Iberia and British merger. I know you have an exclusive relationship with British and I think you do business with Iberia as well. How does that impact the dynamics of those relationships?

Okay, Tyler, Victor will -- Eric will respond to that.

Yes, Tyler, we have to be sensitive about commenting on specific customers or specific products because we do have our competitors on this telephone call -- and we welcome them. However, I can tell you that both British Airways and Iberia are customers of HEICO, and I would not expect any merger combination of those two airlines to adversely impact HEICO. I think both are quite pleased with us and I see good opportunities.

All righty. Thank you.

Mickey Schleien.

Larry, I'd like to understand what your guidance incorporates for the electronic segment. Do you assume a rebound in the telecom end markets, considering that your comments from telecom operators seem to point to higher CapEx on their behalf going forward, to deal with higher dater usage and wireless demand? Also, what about the other electronics end markets in terms of their outlook?

Mickey, Victor will respond. As President of Electronic Technologies, he'll respond.

Thank you.

Hey, Mickey, how are you?

Fine, thanks.

Good. Mickey, the answer is I think we're expecting improvement across most of the product lines in the group. And I would say that we would expect an improvement as well in medical, telecom and some of the other markets that we serve.

Again, we're kind of more focused on the second half of the year than we are in the first half, and we're seeing some signs out there that indicate on the order side, that there's some firming, but I'd like to see it firm some more and I would expect it more towards the second half of the year. Keep in mind, we're already into almost half -- two-thirds through our first quarter of the year.

Thank you.

Chris Donaghey.

Eric, I was wondering if you could comment a little bit on what you're seeing in inventory levels out there. Have they bottomed? Are you starting to see inventories stabilize? Are they still coming down?

Chris, we've seen that they have definitely bottomed. There are still some airlines who have some excess parts, but they have definitely bottomed and a number of airlines have really no inventory right now. I think they're a little bit concerned about what the future might bring, because if the supply chain doesn't have the products, they could end up getting in trouble. So we're definitely, I think, at or past the bottom on that.

Okay, great. I apologize if I missed the detail on this, Larry, but the fourth quarter operating margin in the Flight Support Group at 14%, even on volume that's roughly comparable to the third quarter, can you just talk a little bit about what happened in operating margin on Flight Support in the fourth quarter?

Yes -- Tom will respond and answer your question.

Chris, yes, you're correct. The fourth quarter margin was down in the Flight Support Group. It was really a reflection of a variety of things we spoke about the product mix, the PMA parts being our highest margin product line. We're down more than, say, the repair services distribution. There was some pressure with lower sales and, therefore, higher fixed costs, some of which would have been accumulated in inventory costs in the first half of the year, as we sold it in the second half, brought margins down.

But again, inherent in our expectations for next year is some nice recovery in those margins as we expect increased sales volume in the second half of the year.

Okay, great. Thanks.

Arnie Ursaner.

It's actually Fred Buonocore calling in from Arnie. Anyhow, just wanted to pick up a little bit on the signs of improvement you just talked about, how it looks like inventories are very lean at the airlines. What other things are you starting to see that make you -- indicate that you're seeing signs of improvement and firming of demand?

Well, we -- this is Eric -- we check with our customers and we go as much as we can part by part, and understand exactly how much inventory they have on the shelf. Based on the information that we've received, their inventories are very lean. So that's why we believe that we're at the bottom or past the bottom now -- number one.

As far as other areas of strength, we're seeing, as I've mentioned now for many quarters, unprecedented interest in our new parts -- new parts that we are reviewing for induction. We've got a lot of parts that we're looking at, a lot of customer interest and excitement in us developing these parts for them; and, of course, development of our new parts and getting those sold at the customers. So that's really the basis for the -- I would say the enthusiasm within the group.

Just one -- I want to add a little more color. Recently, the CEO of Delta kind of indicated that he saw the bottoming coming to an end, and he sees a little bit brighter future for the industry and maybe adding some capacity. So, I think the general feeling is that we are getting to a point where this will turn around.

Our experience -- we've been through two or three of these downturns and then upturns. They get to a point where they have to put on the aircraft and they must use the parts and buy the parts and -- well, you can only defer so long, and we believe that will happen. But as I said in my comments, we don't know exactly when; but we feel pretty confident it's going to come in 2010, and I think most people in the industry share that view.

Great, that's very helpful. Then secondly, on the acquisition side of things, have you seen a change in pattern of expectations from sellers? Are they getting more realistic in terms of expected valuations? Or are they kind of just sort of holding out on perhaps somewhat inflated valuations in hopes that things will recover fast?

I think more of the latter. Most people, when they see downturns, they realize that the downturns don't last forever. They just say, look, we're going to suck it up and wait till our earnings come back.

Normally -- the downturn really doesn't help and it does take product out of the market, because they don't want to sell for less, because they feel their businesses are worth -- on a normalized basis, and since buyers won't pay that in a big downturn, it's sort of a standoff. So, it's a little harder to make transactions.

We try to bridge the gap by giving them an earnout, which will bring them back to the -- we pay them based on what they're doing. And then, if they earn it out in the future, then we'll give them what they had expected to receive anyway.

Some accept that and then on that basis, we do proceed. Some do not, but if they don't, we normally feel that if they don't have the confidence to bet on the future, we don't want to pay up and bet on the future that they don't have the confidence to bet on.

So, it's a difficult environment. We have loads of money to buy. As you know, we're very disciplined and we don't change our strategy in the amounts that we pay. That's why we've been able to grow and not get -- after some 35 or more acquisitions, we don't get burned doing this.

Makes sense. Thank you very much.

J.B. Groh.

I was wondering maybe if on Electronic Technologies, if maybe Victor could talk about margins and sustainability. Obviously, that's one of the best margin numbers I think you ever put up in ETG. I know you've cited mix and some good space in defense business, but how should we think of that in 2010?

Yes. I mean, I think this is higher than I would expect to see going forward. I feel comfortable, as I've said in the past, kind of that it would be kind of the mid-20s, things that we've done historically, and I would look to that.

It shifts around a fair amount due to mix and we had a good mix quarter. I would expect it to shift around; but overall, the average [year] will be comparable more or less to the things we've seen in the past.

Is there a little bit of a seasonal impact on ETG as well, with government budgets and that sort of thing year-end?

There can be seasonal impact. I wouldn't say it's so much government budget at year-end, but there definitely can be an impact from government budgets we see throughout the year. So that's why I kind of look for the 26%, 27% overall during the (multiple speakers) [year].

Got you. Okay. Then, Tom, did you give an organic growth number for ETG?

Inherent in our targets for next year, as Larry mentioned, it's about half and half. So -- and it's relatively level between the two business segments, so that would put the organic growth targets for next year somewhere in the 3% to 4% range, something like that.

Oh, but I was asking for Q4.

Oh, Q4. Q4, the acquisition add was about $8 million of revenue. Included in the fourth quarter is about $8 million of revenues from acquired businesses.

Okay. All right. Thanks a lot, guys.

Chris Quilty.

A question for you. I know this is factored into your guidance for the overall business, but can you give us a sense of -- and I guess this is directed at Eric -- of what you're seeing in terms of parked aircraft, the type of aircraft where you're seeing benefits or headwinds, in terms of what's happening with the fleets, and the mix of the fleet between older and new aircraft, new aircraft deliveries, aircraft coming off of warranty, and how that all plays into your forecast?

Sure, Chris. With regard to the older aircraft, I would say the JT-80 and the JT-90 powered aircraft, that's a very small percentage of our business. I mean, the JT-8's, the old original JT-8's and the JT-9's are a very small percentage. We're anticipating a little bit of that coming back.

There's probably going to be some free money in there when -- that will probably come back stronger than we had anticipated, because the amount of surplus out there will end up shrinking, and some people are going to need certain parts that aren't going to be available on the surplus market. But we have not factored that into our budgeting, because it's really just -- it's something that we just can't forecast and invariably should happen.

But that's not the basis for our budgets going forward. Instead, there are a newer aircraft that have been parts, such as 747-400 or MD-11; some 767's that would have, for example, CF6-80C2 power on it. I mean, that's a relatively new engine that's in big demand. And those aircraft have been put down temporarily. And, of course, the aircraft that were put down were the ones that were needing overhauls, so that's what reduced the shop induction. Those, we are very confident, are going to come back. It's just a question of timing.

If you walk around the airports today, you see -- I mean, every flight that I'm on and every flight that folks who come to see us are on and our people are on, are packed. Of course, as one of the airline CEO says, that unfortunately, people don't have the sticker price on them, so they don't know -- you have no idea what they're paying for those seats.

And yield has been a little disappointing; but invariably when demand comes back, yield will ultimately go up. Airlines will put on the aircraft and stuff will get -- will need to be overhauled because it's not ready to fly and we're going to see the volume.

So, I would say the basis of our budget is the newer stuff, CF6-80C2, CFM56, [MB2500] powered aircraft; 747, 400, some 777's, A340's are all going to come back and we're going to sell the products for those. But it's not due to the older aircraft.

Okay. You talked about unprecedented interest in new parts. I know you don't like to get into specifics of what particular parts or OEMs you're targeting, but is there something dramatically new or positive you have in the pipeline? Or is this just attributed to the fact that, generically, customers are interested in saving money in an economic downturn?

Well, I would say it's the latter, that generically, they're interested in saving money in the downturn. In addition, as you know, for roughly the last seven years or so, we've had a big focus on non-engine parts as well. We're continuing to develop engine parts, but we also now have a big line of fuel hydraulics, pneumatic, electromechanical, avionics, wheels and brakes, interiors, structures, landing gear, all sorts of other parts that go on the aircraft.

And some operators who have their business tied up with the OEMs on engines may not have some components or other products tied up with OEMs. So there's been a big focus in that area, and we've seen a tremendous amount of growth. So I'd say that, no, it's really nothing new; nothing significantly new other than big breadth of parts that customers want.

Of course, a lot of aircraft were delivered in certain periods of time in the late '90s as well as sort of the mid-2000s. And those are starting to see some pretty big demand. And the airlines are getting in front of that, and we've got the product breadth and the ability to develop these parts, as well as occasionally, if they want us to do the component repair, we can do that as well. We'll sell the parts to whoever they want on the same basis.

Okay. Final question, Tom, it looks like SG&A was down, what, about 11% this year? Should we expect that to be flat or see some growth in line with revenue growth?

Yes. I think the answer is in terms of absolute dollars, there would be higher growth based on our sales expectations; but in terms of as a percentage of sales, it should stay roughly the current percentages.

Okay, great. Thank you, gentlemen, and congratulations.

Eric Hugel.

Are you guys seeing any meaningful differential in the rate of improvement in newer aircraft engine models, demand for parts versus sort of the older? I'm just trying to figure out, as airlines add back capacity, I guess they still have some slight capacity on the newer aircraft and they're sort of adding that back first. Are you starting to see demand there pick up faster than maybe in the older, less efficient aircraft?

Eric, you're exactly correct. We're starting to see some of the demand in the newer generation products being put back into service, because it's not ready to be put back. It's not in a condition to be able to be put back into service, so they've got to invest the money in that. That's what we're anticipating the recovery being; not the old stuff.

The older stuff will come later maybe in 2011?

Yes, it -- I mean, maybe it could even come in the second half or at the end of 2010 a little bit. But you're right, I would say probably more like 2011. But it's very hard to forecast that, because -- (multiple speakers)

Yes. No, I understand that.

Yes, you're really -- just don't have an idea. And we're not focused on the older stuff. We're not developing products for older aircraft.

Sure. In terms -- I think you said -- I just wanted to make it clear, in terms of the organic growth implied in your guidance, you said that's about evenly split between sort of the growth rate -- the growth rate between ETG and FSG will be about the same? Is that what you said?

Yes. Based on current expectations. Obviously, that could move around if the commercial aviation recovery should be faster or earlier, but within a reasonable margin of error they should be approximately the same.

Okay, fair enough. In terms of what kind of tax rate are you looking for, for 2010?

Again, inherent in our targeted guidance, is about a 35% combined federal, state, international tax rate, which is up over the current year partly because of the tax settlement; but also based on our fiscal year and the schedule of expiration of the R&D tax credit, which may be renewed, but at this point, it's scheduled to expire at the end of this month, basically.

So, some of that inherent tax rate increase is due to the current expiration of the R&D and we could pick up a penny or two if Congress were to extend that. But again, at this point, we have not built that in.

Okay. How should we think about it in terms of when we combine tax and minority interest still around that 50% mark? 50%, 51%?

Yes, exactly.

Okay. Lastly, there's a new, I guess, accounting standard coming into effect with regards to accounting for earnouts. Is that going to have a material impact on you guys?

Those accounting rules relating to earnouts are prospective. And so, as it relates to future acquisition, they will -- we will accrue an acquisition earnout amount at purchase date and then adjust it for any changes. So, it's hard to estimate what the earnings impact would be, depending on how close your estimates are. It does not impact those deals that we've already closed and those earnouts that are contingent already.

Okay. Does that impact sort of how you would use an earnout? I mean, sort of -- yes, I mean, because I mean it seems pretty kind of like -- creates a lot of volatility -- potentially.

It does impact the strategy, but I believe we still see the earnout as a useful tool in the appropriate acquisition opportunities.

You know, my own take on this, Eric, is that we have to run a business, which is an economic entity, and we don't run it because of what the accounting rulemakers say. If it's a good business acquisition and it's going to throw off cash flow and generate cash flow, we're going to structure the acquisition because it's a good thing to do. We'll let the chips fall where they may.

Because in the end, whatever the amortization you try to make estimates, truthfully, we've spent a lot of time going over this, Tom and I and our accounting people, and our outside auditors, and with the guesstimates that they want you to make, we agree with you; there will be volatility and, really, we think this is a very bad rule. However, we'll have to follow it.

But if it's a good acquisition, and we study the -- it's a good deal for us to make, we'll just go ahead and we'll make it. And then we'll explain if we have additional amortization or something like that, we'll reflect it the way we're required to reflect it, but we will explain it to the Street and we will tell people this is what we did, this is how we did it, but we think that this is a very good business transaction for us.

And if it's not a good business transaction, of course, we're not going to do it.

And then -- and keep in mind that, typically, our earnouts run for periods of one, two, three years, and then the uncertainty is over; whereas we're going to own a business virtually forever, so.

All right. Fair enough, guys. Thanks a lot.

There are no more questions at this time.

I want to thank you -- this is Larry Mendelson -- I want to thank you all for your interest in HEICO. We look forward to speaking with you at the end of our first quarter, which will probably be -- our first quarter ends January 31, and we will probably have a call sometime towards the end of February.

In the meantime, if you have any questions or thoughts or comments, we're all available. You know where to reach us. Please give us a call. We all wish you a very happy, healthy holiday season and a wonderful new year. Let's hope 2010 will be a stronger year in all ways for everyone around.

So, good luck and good health, Godspeed, and we'll speak to you in February, if not before.

Thank you. This concludes today's conference. You may now disconnect your line.