HEICO Corp (HEI) 2010 Q3 法說會逐字稿

Good morning, my name is Jennifer and I will be your conference operator today. At this time I would like to welcome everyone to HEICO Corporation's third-quarter fiscal 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. At this time I would like to turn the conference over to Mr. Larry Mendelson, Chairman of the Board of Directors and Chief Executive Officer of HEICO Corporation. Please go ahead, sir.

Thank you very much and good morning to everyone on the call. Again we thank you for joining us; we welcome you to the HEICO third-quarter fiscal 2010 earnings announcement telecom. I'm Larry Mendelson, I'm the CEO of HEICO Corporation, and I'm joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group, and Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group, and by Tom Irwin, HEICO's Executive Vice President and CFO. Before we begin Victor Mendelson will read a statement.

Thank you. Certain statements in today's conference call will constitute forward-looking statements which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors including, but not limited to -- lower demand for commercial air travel or airline fleet changes which could cause lower demand for our goods and services; product specification costs and requirements which could cause an increase to our cost to complete 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 medical, telecommunication and electronic industries which could negatively impact our costs and revenues.

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 statements whether as a result of new information, future events or otherwise. Thank you.

Thank you, Victor. And now before reviewing our third-quarter operating results in detail, I would like to take a few moments to summarize the highlights of our record-setting third-quarter results. Our consolidated third-quarter and year-to-date net sales, operating income and net income represent all-time record quarterly as well as nine-month results for HEICO and they were driven by record results within Electronic Technologies as well as improved results within Flight Support.

Consolidated third-quarter operating income and net income improved 35% and 34% respectively on an 18% increase in net sales over third quarter of last year. Electronic Technologies set record sales and earnings for the third quarter of 2010, improving by 46% and 53% respectively due to strong organic growth of approximately 22%, as well as additional contributions by previously discussed acquisitions completed during the past 12 months.

Flight Support posted third-quarter sales and earnings increases of 7% and 19% respectively and this marks the second quarter in a row of year-over-year and sequential increases in quarterly net sales. Net income per diluted share increased by 33% to $0.44 per diluted share in the third quarter of 2010, up from $0.33 per diluted share in the third quarter of 2009.

Our cash flow and balance sheet remain extremely strong. Cash flow from operating activities was $67.9 million for the first nine months of fiscal 2010, representing 173% of net income and that was up from $43.7 million in the prior year. As of July 31 the Company's net debt to shareholders equity ratio was a low 6.8% with net debt, which is total debt less cash, of $36.3 million. We have no significant debt maturities until 2013.

In July we paid our 64th consecutive semi-annual cash dividend at a rate of $0.06 per share, and this represents a 25% increase over the prior semi-annual per share amount.

Moving on to net sales, our consolidated net sales increased 18% in the third quarter of 2010 to a record of $158.3 million and that was up from $134.1 million in the third quarter of 2009. Consolidated net sales increased 13% to a record $447.7 million in the first nine months of fiscal 2010, up from $394.7 million in the prior year. The third-quarter results reflect growth in both ETG and Flight Support.

ETG reported record net sales of $54.1 million in the third quarter of 2010 and that was up 46% from the $37.1 million in the same period in 2009. Net sales of ETG in the first nine months of fiscal 2010 increased to a record $147.2 million, up 51% from $97.5 million in the first nine months of 2009.

The third-quarter net sales increase within ETG represents strong organic growth of approximately 22%, as well as net sales totaling approximately $7 million contributed by two acquisitions completed during the preceding 12 months. The organic growth in ETG reflects strength in customer demand for certain of our medical equipment, electronic, satellite and defense products.

Flight Support reported net sales of $104.3 million in the third quarter of 2010, up 7% from the $97.2 million in the third quarter of 2009. Flight Support's net sales for the first nine months of 2010 increased to $301.1 million, up 1% from the $297.5 million in the first nine months of 2009. The third-quarter net sales increase of 7% within Flight Support was entirely organic growth; it was about evenly split between commercial aviation and industrial product.

Our net sales for the first nine months of fiscal 2010 by market was composed of approximately 63% from commercial aviation versus 70% in the same period in 2009 and 23% was from defense and space versus 18% in 2009 same period, and 15% from other markets which includes medical, communications, telecommunications and electronics versus 12% in the same period in 2009.

Looking at our operating income, consolidated operating income in the third quarter of fiscal 2010 increased 35% to a record $29 million, up from $21.4 million in the third quarter of 2009 and increased 24% to a record $79.5 million in the first nine months of fiscal 2010 and that was up from $64.2 million in the first nine months of fiscal 2009. These earnings increases reflect growth in both Electronic Technologies and Flight Support.

Operating income of ETG in the third quarter of 2010 increased 53% to a record $15.2 million, up from $9.9 million in the third quarter of 2009, reflecting the 22% organic sales growth and the impact of the fiscal 2010 and 2009 acquisitions. Electronic Technologies operating income in the first nine months of fiscal 2010 increased 51% to a record $40 million, up from $26.5 million in the first nine months of 2009, also reflecting the impact of the recent acquisitions as well as a 14% organic sales growth.

Operating income of Flight Support in the third quarter of fiscal 2010 improved to $17.6 million, up 19% from the $14.8 million in the third quarter of 2009. Flight Support's operating income in the first nine months of fiscal 2010 increased 9% to $50.3 million, up from $46.3 million in the first nine months of 2009. These earnings improvements reflect the higher sales volume and more favorable product sales mix.

Corporate expenses in the third quarter of fiscal 2010 increased to $3.8 million from $3.3 million in the third quarter of 2009 and increased to $10.8 million in the first nine months of fiscal 2010 compared to $8.6 million in the first half of 2009, but remained under 2.5% of net sales. And these increases are primarily due to the higher level of accrued performance awards based upon the improved consolidated operating results.

Looking at our operating margins, in Electronic Technologies they were very strong at 28.1% operating margin for the third quarter of fiscal 2010, up from 26.8% in the third quarter of 2009. This reflects higher net sales and a favorable product mix. ETG operating margins in the first nine months of fiscal 2010 were 27.1% and they approximated the 27.2% reported in the first nine months of 2009.

Operating margins of Flight Support improved to 16.8% in the third quarter of fiscal 2010, up from 15.2% in the third quarter of 2009 and improved to 16.7% in the first nine months of fiscal 2010 and this was up nicely from the 15.6% in the first nine months of 2009. The increases reflect the more favorable product sales mix discussed earlier.

Our consolidated operating margin in the third quarter of fiscal 2010 improved to 18.3%, up very nicely from 16% in the third quarter of 2009, and this reflects the improvement in both operating groups. Our consolidated operating margin in the first nine months of fiscal 2010 improved to 17.8%, up from 16.3% in the first nine months of 2009 and this is principally a result of higher margins within the Flight Support Group.

Diluted earnings per share increased 33% to $0.44 in the third quarter of fiscal 2010, up from $0.33 in the third quarter of 2009. Diluted earnings per share in the third quarter of 2010 include a $0.02 benefit of a lower effective tax rate which I will discuss in more detail shortly. The majority of this benefit was included in our prior full-year fiscal 2010 earnings estimate.

Diluted earnings per share increased 18% to $1.16 in the first nine months of fiscal 2010, up from $0.98 in the first nine months of 2009. As we previously pointed out, earnings per share in the first nine months of 2009 included a $0.04 benefit related to the settlement of an income tax audit making the fiscal 2010 increase even larger when you exclude the one-time benefit items in 2009.

Depreciation and amortization expense was $4.7 million in the third quarter of 2010 compared to $4 million in the third quarter of 2009, the increase is primarily a result of higher amortization expenses related to the intangible assets acquired as part of the three acquisitions completed by ETG since May of 2009.

R&D expense increased 18% to $6 million in the third quarter of 2010, up from $5.1 million in the third quarter of 2009. Our investment in new products and services grew to $16.5 million in the first nine months of 2010 which was an increase of 12% from the same period in 2009. And we remain confident that these increased expenditures will allow us to offer lower-cost products which in turn will facilitate market share growth. That has always been our strategy for the last 20 years and it's been very effective.

For the full fiscal 2010 we continue to target approximately 600 to 700 new PMAs and DER repairs. Significant ongoing new product development efforts continue also within Electronic Technologies. We believe that this commitment to invest in new product development has proven very effective over the years as it aids in our long-term growth strategy.

SG&A expenses were $28.6 million for the third quarter of fiscal 2010 compared to $24.4 million in the third quarter of 2009 and were $81.8 million in the first nine months of fiscal 2010 compared to $68 million in the first nine months of 2009. The increases are due principally to the additional operating costs associated with the recent Electronic Technology acquisitions and higher operating costs supporting the growth in consolidated net sales and these are primarily personnel costs.

SG&A spending as a percentage of net sales was 18% in the third quarter of 2010 compared to 18.2% in the third quarter of 2009 reflecting the benefit of higher net sales on the portion of SG&A expenses that are fixed costs, and these were partially offset by an increase in amortization expense of intangible assets associated with the recent acquisitions and the higher level of accrued performance awards based on improved consolidated operating results.

SG&A spending as a percentage of net sales was 18.3% in the first nine months of fiscal 2010 compared to 17.2% in the first nine months of 2009 and the increase reflects the increase in amortization expense of intangible assets associated again with the recent ETG acquisitions as well as the higher level of accrued performance awards previously mentioned.

Interest expense in the third quarter and the first nine months was not significant due to our low debt levels and low variable interest rate under our revolving credit facility. As I mentioned earlier, our net debt is only $36.3 million as of July 31, 2010. Other income in the third quarter and the first nine months of 2010 and 2009 was not significant.

Talking about income taxes, HEICO's effective tax rate increased to 32.3% and 34% for the third quarter of 2010 and the first nine months of 2010 respectively, versus 30.4% and 30.3% in the third quarter and the first nine months of 2009. The increase in the third quarter of fiscal 2010 is principally due to the expiration of an income tax credit for qualified R&D activities and this ended December 2009.

The year to date increase principally reflects the benefit of the audit settlement in the prior year and the expiration of the R&D income tax credit and a higher effective state income tax reflecting the impact of recent acquisitions.

Our effective tax rate of 32.3% in the third quarter of 2010 is less than the 35% rate experienced in the first half of 2010 as the third quarter includes a $732,000 decrease in the liability for unrecognized tax benefits that principally relates to the finalization of fiscal 2009 qualified R&D tax credit study activities. As mentioned earlier, the lower effective tax rate increased diluted earnings per share by approximately $0.02 in the third quarter.

Net income attributable to non-controlling interest totaled $4.6 million in the third quarter of 2010 compared to $3.8 million in the third-quarter 2009 and totaled $13.2 million in the first nine months of 2010 compared to $11.6 million in the first nine months of 2009. The increases are attributable to higher earnings of certain Flight Support and Electronic Technologies subsidiaries in which non-controlling interest exist.

Moving on now to the balance sheet and cash flow. I mentioned earlier that our cash flow and financial position remains extremely strong. Cash flow from operating activities in the first nine months of 2010 totaled $67.9 million including $27.7 million generated in the third quarter of fiscal 2010 and this is up from $43.7 million in the first nine months of 2009. Our working capital ratio remains strong at 3.8% at July 31 compared to 3.7% October 31, 2009.

DSOs of accounts receivable improved slightly to 49 days as of July 31, 2010 down from 50 days as of October 31, 2009. And I've said this before; we do work carefully and very hard to reduce our credit risk through the regular monitoring of all of our receivables and strong collection efforts. And we really have an outstanding team that stays on top of this issue constantly.

Our inventory turnover rate at July 31, 2010 was 129 days, down slightly from 133 days as of October 31, 2009. And again, we are managing our inventory levels I think very, very well. No one customer accounted for more than 10% of sales. Our top five customers represented approximately 18% of consolidated net sales in the nine months of 2010 compared to 21% in 2009 and I consider this a very nice improvement.

Capital expenditures in the first nine months of fiscal 2010 were approximately $6.7 million; we currently estimate Of $10 million to $12 million in the full fiscal 2010.

Now a comment about the outlook. As we look forward to the balance of fiscal 2010 and beyond we are seeing some signs of improved product demand within commercial aviation and this represents -- that segment represents over 60% of our consolidated net sales.

Based upon current market conditions within our aviation and other markets we are raising our fiscal 2010 net sales target to approximately $600 million representing growth of approximately 11% over fiscal 2009. And we are raising our net income per diluted share targets to a range of $1.50 to $1.53 representing growth of 14% to 16% over fiscal 2009.

We continue to expect consolidated operating margins for the full fiscal year to approximate 17%. These targets exclude the impact of any potential acquisition opportunity.

The fiscal 2010 sales target of approximately $600 million reflects forecasted fourth-quarter growth within Flight Support of between 3% and 4% over last year, all organic, based on the moderate strengthening we have seen within the commercial aviation market to date.

Based on the current water backlog and recognizing that ETG has reported two consecutive quarters of record sales, we are forecasting fourth-quarter growth within ETG of approximately 12% over last year and this will be represented by sales contributed by recent acquisitions. As we have mentioned in the past, sales and operating income of ETG can vary significantly from quarter to quarter and at times it can be lumpy.

Cash flow provided by operating activities is expected to remain strong and to an approximate $78 million to $82 million for fiscal 2010, this is higher than our previous estimate of $75 million to $80 million.

In closing, let me say that we believe that our strong commitment to develop new products and services, our efforts to increase market penetration, our continued strong financial position and disciplined acquisition strategy will provide opportunity for continued substantial growth in profitability.

And one other comment -- that we continue to focus on the acquisition of companies that have strong operating margins, hopefully 20% or more. Our business strategy calls for businesses with high operating margins and that's been a consistent strategy for the last 20 years and it's served us very well. That is the extent of my prepared comments. And now I would like to open the floor for any questions that you might have.

(Operator Instructions). Tyler Hojo, Sidoti & Company.

Good morning, everyone.

Good morning, Tyler.

First thing I just want to ask, did I hear you say that you and expect ETG to be up 12% in the fourth quarter year on year?

Tyler, this is Tom Irwin. Yes, that's the current projection based on the backlog of orders that we have within that segment today, which again represents -- substantially all of that would be from acquired businesses as opposed to additional organic growth that we've seen in the second and third quarter.

Okay, understood. Now I'm just trying to understand, relative to some of the comments you made on the second quarter call, where you indicated you kind of saw a benefit from some shipping schedules in ETG which work to your favor in the second quarter and to the detriment of the second half. So now I'm looking at obviously a very strong and impressive quarter here in 3Q and additional strength in 4Q and I'm just trying to figure out exactly what has changed.

Yes, I think as we went into the third quarter we didn't have a high level of confidence that it would be sustainable as to the level that we saw in the second quarter. It turned out to be it was sustainable and there were some additional orders that were accelerated. But our caution now relative to the fourth quarter is that those orders are not in our backlog and there could be some risk of some things being pushed to the right which does happen in that segment.

It's the kind of history of being lumpy. Again, we're not suggesting the business is falling on hard times. Even with that forecast of no organic growth in the fourth quarter, so [inherent] in that is about 9% organic growth for the full year in that segment, which I think given the economic times, even though they're in some good industries, it's still again a strong performance by our ETG group.

Understood. Is it possible to characterize from a product perspective where some of that strength has come from?

Victor?

Yes. Hi, Tyler, this is Victor. It's been pretty broadly based for us across just about all of the products and product lines we have. So it is -- some are stronger than others, but overall it's been pretty good across the board.

Tyler, this is Larry. I just want to make a comment. In the press release in my quotation, I mention somewhere in here we're very proud of our team and the results and so forth. I just want to emphasize that on the call.

When we look around HEICO, and we've done some traveling, we've all been traveling this summer and visiting various facilities. I wish that the investor base could see or meet some of the outstanding team members that are running these subsidiaries. I mean they are really impressive. And they are very highly motivated and incentivized by money; money really works.

And they want to earn these bonuses. Some of them get huge bonuses for producing. And they're very reluctant upfront in their budgets to come forward and say, we're going to do this and do that. But believe me, in their heads they're thinking they want those bonuses and they want those subsidiaries to shine.

And in fact, without being specific, I can tell you that Victor and I visited a few of them and these guys are really outstanding. So, I don't say they sandbag their numbers, they don't, but they try to be conservative and they have generally surprised to the upside and we're very happy. But they're incentivized to do that.

Okay, that's good color and I appreciate that. Just one other thing for me. So if I look at your full-year guidance of $600 million approximately, I can get to kind of a growth rate for the Flight Support Group for the fourth quarter of call it 4%. So that's down a little over 300 basis points from the growth rate in the third quarter. I mean, is that conservatism or are you concerned that perhaps we're seeing a bit of a slowdown here just in terms of the commercial aftermarket?

Tyler, this is Tom. No, I think your computations are reasonable, it's in-line with the math and so on and so forth. What we see in the fourth quarter is the potential of some -- as Larry mentioned, in the third quarter the organic growth was both commercial aviation and industrial products. At this point we don't have in the backlog Flight Support Group that same incremental growth in the industrial product.

So, if you back out the industrial product from the third quarter you're in that 2% to 3% organic growth. So the answer is as it relates to the commercial aviation, no, we're not seeing a falloff. the falloff is based on scheduled shipments of industrial products, which again are less than 5% of the commercial aviation group, Flight Support Group.

So some situations that resulted in some -- back in the second quarter are probably $3 million to $5 million of sales, slightly less in the third quarter and again slightly less expected in the fourth quarter. (multiple speakers) is where we're seeing the moderate strengthening.

Okay. So it sounds like industrial products will continue to be kind of a swing factor for you guys and you just aren't really counting on it in the fourth quarter, is that fair?

That is correct, yes.

Okay, great. Thanks a lot.

Thank you, Tyler.

Ken Herbert, Wedbush Securities.

Hi, good morning, everybody.

Good morning.

I just wanted to follow up on that. I mean it seems like specifically for the aftermarket within Flight Support at about 3% to 4% growth for the fourth quarter year-over-year, that implies a sequential decline from the third quarter to the fourth quarter in the Flight Support Group.

Is that -- should we be thinking about the aftermarket within Flight Support Group as essentially flat sequentially and that decline is the industrial side, or how should we -- can you drill down into that a little bit for us?

Yes, basically in that forecast there is a contemplation that the industrial product would fall off and the commercial aviation would have a partial uptick, but not a fall-off there.

Okay. And does that explain as well -- when I look at the full-year EPS guidance it implies essentially a flat -- a $0.35 flat number with the fourth quarter of last fiscal year.

Again, in drilling down into that, is that largely some of what you just talked about, obviously, in the industrial supplies within Flight Support Group, or is there anything else there that we should be thinking about?

Inherent in that guidance as we mentioned in the ETG, if ETG falls in the range of the numbers we are talking about it, it would be down relative to the fourth quarter of last year. But again, that is a lumpy business. And last year the fourth quarter of the ETG group, which operating income you may recall was around $13.5 million, that compares to the three other quarters that operating income in that segment was under $10 million.

So they had a very strong fourth quarter last year. So again, quarter- over-quarter we would expect Flight Support Group to be up inherent in our guidance and the ETG to be down some.

Okay, thank you. Then just finally then within the Flight Support Group, can you comment specifically within the aftermarket? You mentioned you are starting to see this strengthen. Can you comment at all about the mix within your products as well as your service business? Are you seeing strength in one area relative to the other or in any particular area?

Ken, this is Eric. Yes, we are seeing more strength in the parts business as opposed to the service business in slow Flight Support Group, and again that is both on the Aerospace and the Industrial side. But we are seeing continued interest in our repair services; there's a very good opportunity for us, it's been a very successful business and we anticipate it to continue to grow.

Over on the parts side I'd say the interest has been across the board on everything from engines, components, airframes, all sorts of different products that we are doing. There's just a general -- we've been speaking about now for years there's an increasing acceptance of alternatives and the airlines realize they need to incorporate more of this to reduce their expenses and we're working very hard with them to do that.

Well, very good. Well, thank you very much for the color and great quarter.

Thank you very much.

Arnie Ursaner, CJS Securities.

Good morning.

Good morning, Arnie.

Yes, I think you've sort of been asked this in a few different ways, but I'm going to try again. On FSG, your 3% to 4% of you -- improvement year over year doesn't make a lot of sense. Last year in Q4 you were down 16%, airlines were cutting capacity as fast as they could. We're seeing a completely different dynamic now. So I'll start with that as an observation and maybe -- well, why don't we start with that.

It just doesn't seem to make sense with everything we're hearing from the IATA data. Even in Q4 last year you indicated at that point your customer inventories were at or near a bottom and nearly at a point where any pickup in traffic would require potentially urgent replacement.

Arnie, this is Eric. We're very proud of the results. If you look at our results compared to the other aerospace companies I think our results compare very favorably. The other aerospace manufacturers continue to report declining or flat sales, a few of them are up a little bit. But they have not come out and reported a rebound despite the amount of air travel that's occurred this summer. A lot of the equipment is out there flying.

We've been very careful to not predict when the [balance] is going to happen other than to say that it's really not sustainable. Some of the other companies have been out there and have predicted it -- that it was going to occur a year ago and then in the first half and now in the second half and now in 2011. We've been very careful to be very conservative and just report what we've seen.

But we do know that -- I mean it's only logical if the aircraft are flying out there they're not getting a lot of maintenance and that sooner or later there's going to have to be a maintenance performed where it's been deferred and inventories are very lean. But again, through the third quarter I think the results speak for themselves and are really very favorable when compared to the rest of the industry.

I appreciate, but a company like Transdigm just reported double-digit improvement in their maintenance work and, again, it seems to me that your parts are as critical as Transdigm's are. 3% to 4% seems incredibly conservative. But let's leave it at that for the minute.

Let's shift gears and talk about your operating margin guidance for the year and maybe a better understanding of your business model. You did a 17.8% operating margin for the first nine months, with additional growth in FSG you should see an improvement in that segment margin unless there's a very unusual mix issue.

I'm hard pressed to see why your operating margin would be -- would have to be at least 150 basis points below your first nine months number to meet your operating margin goal for the year. What would cause that? It doesn't seem to make any sense.

Arnie, this is Tom. Again, I think the big variable in our guidance relative to the first nine months is the record results in the ETG group, both record sales, record operating income dollars and margins and the 28% we see based on -- again, we have a little bit more visibility in ETG based on the backlog numbers and the orders that are scheduled to go out in the third quarter did go out, plus what's scheduled to go out in the fourth quarter.

And again, there is -- inherent in our expectations are that there might be a falloff in operating margins within ETG versus the first nine months. But again, for the full year inherent in our numbers is very, very strong operating margins for the whole segment for the whole year. But again, that's a lumpy business in terms of revenue, margins and obviously operating income dollars.

And again, the full year is going to be very strong but the fourth quarter might fall off some in terms of percentages as well, which would obviously impact the mix for one individual quarter. We consistently manage the business for long-term profitability and we're not focused so much on one quarter versus another quarter, I think that's what we're saying and particularly in ETG.

And Arnie, to add on what -- this is Eric, to add on what Tom said, it's important to note that most of the Flight Support revenue increases are due to an increase in volume as opposed to due to increases in price. That's not to say we don't have price increases, we do. But unlike what typically occurs in the industry with other companies achieving revenue growth largely from price increases, that is not HEICO's model. So again, you're not going to see the pricing driving revenue, it's really volume -- unit volume increasing.

Incidentally, Arnie, Transdigm, as I have said to many people, is an outstanding company. They are very, very well run. I believe they focus on price increases more than we do. Our strategies and Transdigm are different even though we are in the same industry; their product line is very different than our product line and so forth. And we really do focus on a very long-term strategy in our pricing and the numbers fall where they fall out.

But we do see continued growth as the industry gets stronger, as capacity begins to fill in. All the reports from IATA show that capacity is increasing, planes are flying fuller and they're putting more planes on. So I have confidence in the future that Flight Support will increase.

We have to be very careful in our guidance that we don't get ahead of ourselves and say things that we think might happen and then reflect those in our numbers. And traditionally we have avoided doing that and we only report or predict what we are very certain about. We don't speculate on the future.

Personally I'd be disappointed if we didn't do a lot better. But we don't want to trumpet that because we don't have hard facts to base it on at this moment. Hopefully that will change and personally I think it will. But until it really is clear that it definitely will happen we would prefer to err on the side of conservatism and play it down. If it happens it happens and the earnings will come through.

All right. If I can just as maybe a longer term -- I know you won't provide your formal views for next year until late December. But if you were to look at your business over let's say the next four to six quarters, just remind us if you would of how you see the operating leverage in your business in both of the segments?

I don't think that the operating leverage, particularly in ETG, you're going to see great operating leverage. We operate at over 28% operating margins. I don't think there's real operating leverage there. In the Flight Support Group I think we can push up into the 18% -- 18% to 19% is the top operating leverage.

Where I do see the increase in the business, you know that we target a growth of 20%, a compounded growth, and we've done that for 20 years. Speaking very selfishly as the largest shareholders, our family and the team members, we get compensated in stock value really because that's where the big compensation -- because we do grow. And I see growth in acquisition.

I don't -- I mean, there may be some margin expansion and operating leverage that we'll see, but the big thing is going to be increased sales, hopefully some very strong acquisitions, although until they're done they're not done. But I personally am looking at 20% and I still hold that target and that's what we're shooting for. And even in a bad year such as this we're not doing too badly in terms of growth. But I don't see the operating -- I wouldn't count on great operating leverage from here. Tom, do you agree with that?

Yes, I would agree. We're talking about again historically the operating margins have peaked in the 17% to 18% range and so that's in line with I think what Larry is describing as to opportunistic going forward.

Thanks very much.

Thank you, Arnie.

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

Good morning, guys. Hey, congratulations on a fantastic quarter. I think all my questions have been answered on the margins and the guidance. But maybe, Larry, you could talk about what you're seeing on the acquisition front in terms of opportunities and specifically how multiples are trending and the number of opportunities versus maybe a year ago?

Well, first, J.B., let me thank you for the compliment, it's very kind. To answer your question, we have a number of transactions that we are in active due diligence on. They are all priced within our normal pricing, five to seven times EBIT, not EBITDA. I would say probably -- if you want to focus in closer, probably lower maybe 6 times 6 or even 5.5, 6 times EBIT, not EBITDA.

These should all prove to be -- if we close them they should prove to be accretive to the earnings. They are all reasonably good cash flow businesses, and I think the pipeline is as full as it's ever been. Unfortunately because of our strategy we are priced out of some of the very expensive opportunities where they want 10 and 12 times EBITDA and there are some very good companies, but the price we feel is too high for us. And so we're not playing in that field.

But I do see good opportunity. And I would expect, based upon past experience, that we'll make our normal somewhere between two to four acquisitions in the fourth -- in the upcoming year. As to whether we can close a transaction by October 31, the end of the fiscal year, I don't know because a lot depends on due diligence.

And we do, as you know, a very, very thorough due diligence with our own staff, our own in-house staff really scrubs the business, scrubs the financial. We go out and we speak to their customers and we really try to cover the waterfront. We've been very successful in our acquisition program by being extremely thorough.

Now the corollary to that is that when we dig and dig and dig sometimes we find things we don't like and then the deal collapses and we walk away. So that also can happen. But as a general comment I think the acquisition pipeline is strong, I would be surprised if we didn't close a good number at favorable accretion numbers to the Company.

And more opportunities in ETG mostly, or is there Flight Support stuff as well?

I would say in both. I think that we have opportunities on both sides. As you know, it's always been our desire to have a balanced company so that ETG would be about 50% and aerospace 50%, so it could be 60-40, it could be 50-50. So we want to keep it and that range. But the opportunities that come along, sometimes you get a lot of ETG and sometimes you get at a lot of Flight Support. But I would say at this time it's pretty evenly balanced.

The other thing is you never know which deal is going to work and, again, the due diligence is so critical. We look at a deal, on paper it looks great, they show us the numbers and then you start to dig in and you find that there's bedbugs under the sheets. And then we have to walk away. And that's why until the deal is closed it's very hard even at my level to speculate whether it will get done.

We always go in with a positive outlook. We want to make the deal based upon the information we're given initially -- the financials, the market information, the customer list. We decide, yes, that's a deal we want to do. Virtually they're 20% operating margins or better, reasonably good cash flow and so forth. But once we get in there then the rubber meets the road and I don't know.

But again, I'm optimistic that we will close a -- what I would call a normal number which would be two to four. We are looking at some which are truthfully a little bit larger, but nothing that we're going to choke on. We do singles and doubles. But maybe we're pushing some doubles to triples in one or two cases in terms of size. I don't know if it will happen. But it's certainly nothing that is going to tax our financing ability. We're not going to have to go and sell the farm to do any of these deals and they would all be nicely accretive.

In terms of other uses for your cash flow, would it be a potential to buy out some of these minority interests?

Yes. We have -- in many of the situations we have put and call provisions, I think really all of them. So the owners of the minority interest have the opportunity after a number of years to put their shares to us, normally over a period of time, not all in one year. And we also have the right to call the balance of the shares.

So some of actually current -- in the current year in the cash flow -- Tom, isn't there --? We spent some money on the redemptions and that's in our cash flow statement. So, yes, we will be retiring some of these minority interests.

Okay, thanks. I'll let someone else ask questions.

Thank you very much.

Eric Hugel, Stephens.

Good morning, guys. Good quarter.

Good morning, Eric, thank you very much.

Victor, was there any -- the sales in the ETG business were great. Was there any acceleration of demand out of the fourth quarter that was pushed forward?

I would say probably a small amount. Sometimes it's difficult to judge that, but it would be a small amount.

All right, fair enough. With regards to the IGT, the Industrial business in the FSG, I guess I'm trying to figure is that a very high margin business? And so what we're seeing there in terms of the margins, is that more should we think about really the PMA business growing much faster than the average driving the margins or is it really you getting nice profitability out of the industrial gas turbine sales?

We have to be careful to obviously not speak about margins of particular products for competitive reasons. But I can tell you that it's generally consistent with our other business. And we're seeing both growth on the Industrial side as well as the Aerospace side. And by the way, when we say Industrial, that's not solely IGT, that's a number of industrial products.

Okay, fair enough. So we should assume then that if we look at the underlying parts business, which is the higher margin end of that business, it's maybe growing 2X the underlying growth rate of the underlying sort of commercial aerospace, sort of that 3% number that you threw out, is that sort of safe to assume?

I'm not -- I don't really -- I'm sorry, I don't understand your question.

I'm just trying to figure out the underlying parts business, the commercial aerospace parts business. Are you saying total commercial aerospace in the FSG segment was growing 3%, the parts business should be growing -- if you're getting that kind of margin expansion, should be growing much faster than that. Is that safe to assume?

Well, we said that the repair was -- parts was growing at a faster rate than the repair side. And I think at the end of the year we break out the percentage of parts versus repair in our Flight Support segment.

Yes, excuse me, that percentage is still running about 60-40 over a long period of time over the last 12, nine months or so.

Maybe, Eric, can you give us a little break out maybe by region sort of what you're seeing in the PMA or in the commercial aerospace side of the business -- North America, Europe, Asia, Middle East, what's going on in those regions?

Yes. I would say that we continue to see growth worldwide for us. Historically we had less penetration in the international market. So we saw there was a bigger opportunity for us there and we're continuing to mine that opportunity. But I think there is opportunity in all of the segments. The growth from quarter to quarter can bounce around (technical difficulty) a particular airline or a particular product that they're buying. But I would say that in general the international market is growing at a faster rate than the domestic market.

Okay, fair enough. And lastly, with regards to your CapEx expectations, I guess that's a big -- there's a big jump in the fourth quarter. Can you sort of talk about what's going on there?

This is Tom Irwin again. Based on what we've got scheduled to spend, again it is an estimate and cash acquisitions or CapEx expenditures sometimes have to do with timing and purchase order releases and so on and so forth, but that's just basically our best estimate. I guess what you're pointing out is year to date we've done, what, $6.7 million.

On the low end it's probably not too much higher, at the $10 million low end of our estimate it's obviously not that much more. At the high-end is some of the stuff that's in our budget, but it has not yet passed our capital expenditure review, that could drive it to $12 million. But that is not committed capital at this point.

Okay, so there's no like major facility expansion or something like that that we should be understanding, just normal --?

That's correct, not at this point, yes.

Okay, great. Thanks a lot, guys.

Thank you.

Mickey Schleien, Ladenburg.

I want to understand the dynamic of aircraft that are being brought back out of mothballs out in the desert and the impact of those -- of that inventory on demand in the FSG group. More specifically, are these aircraft newer models for which you generally don't supply parts or are there some older models that do incrementally add demand given that they've been sitting around a while and would obviously need some maintenance?

Mickey, I think the answer is both. And truthfully, we have given up trying to correlate it directly to -- because we've never been successful at figuring out how long after they bring aircraft back and which planes and all that stuff. And some of the planes, the statistics you read about aren't even our customers. So it gets very confusing and it's hard to correlate the aircraft in the desert coming back into utilization.

However, we do know that over a longer term, six months, a year, two years, as they bring more planes in, some of those planes have to -- some of them are new ones like you suggest, most of them are the older planes. And we will get some parts opportunity as time goes on. But we're not able to correlate it as closely as we would like to and I'm sure that you would like to.

And, Mickey, this is Eric. I mean obviously the dynamic is the airline -- each airline will park its least fuel-efficient or its most expensive aircraft, which is typically the aircraft that's most fuel inefficient as well as they'll consider what aircraft needs maintenance. So airlines or customers who have older equipment that's been parked that will be called out and we'll go ahead and supply those parts.

There are many of our customers who don't operate old equipment. For example Lufthansa. So if Lufthansa hypothetically has parked a 747 400 or an A320 and they bring that they will utilize the parts from us on that as well. So it really doesn't matter whether it's a new piece of equipment or an older piece of equipment that's been parked. We're going to supply the parts either way.

And what's your sense then of their inventories of parts? We've been talking about for several quarters where they have just driven their inventories down to unsustainably low levels. Do you see them rebuilding those inventories at this point, particularly given that many of them are reporting very strong results for the first half of the year?

Yes, I mean, through the third quarter we reported what the -- the commercial numbers were up. Again, the equipment is all out there flying right now. So, we through the end of the third quarter haven't seen a huge snapback, but logic would dictate that sooner or later this is going to happen. I mean, the maintenance is at what we believe unsustainably low levels as well as the inventories have been drawn down and are very lean.

So, we think what will end up happening is they're going to realize the inventories are far too small for even the current level of maintenance. And when the level of maintenance increases X% they're going to realize that they're very short on the inventory and there should be a reaction at that point. But again, through the end of the third quarter we reported what those numbers were.

Right, so everything remaining equal in terms of demand, the economy, things of that nature, that snapback could occur sometime in let's say the first half of next year?

Well, we've been very careful about predicting a snapback because with our business we tend to have very short lead times on our products. We tend to have them on the shelf. So when the customers want them they order them and we deliver them pretty quickly. So we don't have the visibility that some other companies do when they're able to dictate or their business model supports longer lead times.

So I think it really is going to depend very much on the broad economy. If air travel remains strong I think it will obviously happen sooner than if air travel starts tailing off a little bit. But it really depends on what happens with air travel. So I'm reluctant -- I don't mean to not answer, but we just don't have that data to know exactly when it's coming.

Okay, my last question. Would a prolonged strike at American Airlines, or AMR I guess, impact you materially given that contract negotiations there are just not going very well?

I would not say that it would impact us materially. We're careful to not speak about any particular customer, but American is a very good customer of ours and so it would impact us. But I don't think that it would be material. And also, we are hopeful that there really wouldn't be a prolonged strike, because with the economy out there and the lack of jobs out there I'm hopeful that labor doesn't go down that road and that labor and management are able to come up with something that works for everybody.

Appreciate your time, thank you.

Steve Levinson, Stifel.

Thanks, good morning, everybody.

Good morning, Steve.

Thanks a lot for all the detail. Most of my questions have been answered but I thought maybe you could talk to us about the leasing companies, they've become a little bit more active here. And what are you doing with the leasing companies? What are you hearing about their attitude toward using PMA parts?

Sure. When leasing companies look at PMA parts they look at it in multiple areas. And I would say that the leasing company that has been the most vocal about not wanting to use PMAs, surprise, surprise, has been General Electric, [GCAS]. However, I can tell you that GCAS has got many competitors out there and those competitors do permit the use of our parts when requested by their customers and we have had success in getting these competitors to realize that there is a strategic advantage that they can offer their customers.

Specifically GCAS has come out with the argument that if a PMA part is used that may restrict the marketability of the aircraft after they take it back. And we say that that is just sheer nonsense. When you look at 19 of the world's 20 largest airlines our customers accept our parts, this is not a valid argument. It's really just an argument for frankly General Electric to try to gouge their customers and sell more overpriced engine parts.

So, GCAS' competitors realize this, there's no love for GE or GCAS there. And we've been successful in educating them as well as the community that these parts are acceptable. Now, when it comes to non-engine parts, that is typically not an issue that GCAS or anybody else gets involved with. So it's more specifically just a GCAS and an engine parts issue.

Great. That was real helpful. Thanks a lot.

You're welcome.

Thank you.

Chris Quilty, Raymond James.

Hi, Larry.

Good morning, Chris.

I'll try to do a couple of quick questions. Tom, just in regards to the acquisitions you're looking at, any changes in how you would pay for these things in terms of the mix of cash, stock and earnouts that you've traditionally done?

I would say generally no. Traditionally we use cash, our traditional selling opportunities are individuals that are looking for diversification and so on and so forth. We have used stock on occasion. But at this point we have a revolving credit facility substantially all of which is unused, it's a $300 million facility and, as Larry mentioned, our net debt is under $40 million. So we have substantial cash opportunity and probably, never say never, but if necessary we might, but more traditionally the answer is no and wouldn't normally expect so.

Chris, strategically or tactically for us cash is the least expensive way to buy companies. We can afford the cash. Right now we're paying 80 basis points or 90 or something like that for interest and in the foreseeable future we don't think it's going to go up too much more. And stock to us is a much more valuable commodity. So we don't want to give out stock and, as Tom mentioned, most of these people are entrepreneurs that would like to see some cash and put it away as they get older. And it's a win-win for both of us. So right now cash is the most likely medium of exchange.

Okay. And I guess a question for, this is Eric and Tom, in terms of the inventory. Eric, you seem to indicate that you think some of your customer inventory levels are low, your inventory levels look sufficient I guess at this point. But have you had any issues with inventory in terms of increased obsolescence or write-off because of the change of the fleet and engine types required out there or has it been relatively unchanged?

I would say that it's been consistent with past cycles. I mean our business assumes a certain level of obsolescence. And we have that -- all of those reserves or write-offs, scrapping of that inventory is already incorporated in our publicly reported results.

And in that regard the numbers have not varied significantly in the last 12 months or so, there haven't been any big increases or decreases (multiple speakers) recent quarter.

And, Tom, I don't know if you gave it, but tax rate guidance for Q4? And then more generally, I haven't heard you talk about it, but are you dealing with Congress' failure to pass R&D tax credits or does that impact your business?

Yes, first of all, relative to the fourth quarter, our first half of the year was about 35%, that's what we would expect in a normal current environment. And again, the third quarter was a bit lower than that maybe 2.5 points lower than that. But I would say 35-ish in the fourth quarter would be more normal, that was our previous expectation and it continues to be the normal.

The answer is relative to the R&D, our outlook and our forecast has considered the expiration of the R&D. The answer is yes, we did lose the R&D as based on our friends in Washington's failure to renew that R&D credit which we think is ridiculous given the fact that what it does to businesses, both small and large businesses, and we certainly hope they'll come to realize that and take action.

But at this point we have lost the R&D tax credit, which on an annual basis has been a couple pennies a year or something like that or more depending on the activity. So, we do hope they will renew that. I think our expectation is it will not be renewed in time to be considered by HEICO in our current fiscal year.

Okay. And final question since I haven't gotten to talk to Victor. Just generically speaking on the strength of the business, which I think you said was pretty broad-based across space, defense, medical and whatnot. Organic sales were down last fiscal year, it looks like they're going to be up maybe a little bit over the long-term trend this year. I know you don't provide guidance out to next fiscal year yet, but it's probably fair to assume the more high single-digit long-term sustainable growth in that business going into next year or might the growth rate be a little bit slower next year on tougher comps?

Well, that's a very good question. We're in the process of doing our budgets now for next year and really drilling down and analyzing it. At this point I would be most comfortable telling you what I know you've heard me say many times over the years, and that is to expect mid single digits organic growth out of the business and if we do better we'll let you know.

Okay, very good. Thanks, guys.

Thanks.

Thank you, Chris.

Jim Foung, Gabelli & Company.

Good morning, great quarter.

Good morning, Jim.

Most of my questions have been answered. But let me just ask you a more long-term strategic question, Larry. There's a lot of talk about reengineering the narrowbody engines and even possibly doing a whole new engine. And I was kind of curious to see if they were to embark on the re-engined narrowbody engine, would that prompt airlines to reduce their maintenance of their existing engines in anticipation of buying a newer one in the near future?

My answer is probably not. But I'm going to give that to Eric, he'll give you more detail.

Jim, this is Eric. If airlines have new equipment on order and they're expecting short-term delivery, that always impacts their expected maintenance. However, this particular engine isn't flying yet, I mean it's not contemplated to be on there. There are so many engines outstanding in service right now that we don't anticipate that there would be any impact whatsoever to our business for at least 10 years or so. I mean, it would be a very long time until this happens, if ever.

Also just to point out, obviously Pratt wants the new engine to be out there because they don't have very much content on the narrowbody engines, but if you look at GE, GE doesn't want it to -- isn't in a rush to get this engine out there. And if you look at Boeing and Airbus, their margin is coming largely from their narrowbody fleet. So I don't think that they're going to be really a big driver at the moment of this. But it's not something that we're really focused on I would say for the next decade, it's really not going to have an impact on our business model.

And, Jim, just to add to it. As Eric mentioned, there are so many -- I don't know -- 18,000 CFM 56, there are thousands of CSX6 and these other drivers. There's also a lot of [JTADs] that are still flying, it's probably -- I don't know, Eric -- 5,000 JTAD (multiple speakers)?

(Multiple speakers).

Yes four or five. There's a lot of -- it's a big population of engines. Airlines are not flush, as you know, with cash to go out and buy new engines. And they've got a huge investment in the existing engine population. So as Eric says, 10 years at least.

And as a matter of fact, you take an engine like the GE 90 where we have little or no content and that's because there aren't enough engines in the fleet and the population to make it worth our while to go after parts in that engine. So, until there would be a significant population of both new engines, which, as Eric says, may be 10 years from now, we do not see that as a significant long-term strategic barrier to what we're doing.

Great, okay. So if it happens it would be very distant long ways in the (multiple speakers) for anything to impact your business. And then just one other question regarding your PMAs this year. You're doing about kind of 400 to 500 PMAs this year. And I was just wondering when do you think we'll begin to see the impact of those new PMAs that you're doing this year as we go out (multiple speakers)?

Well, probably the same as always. They get into the stream over three to four years. We always say as an example, if a part is estimated to generate $100,000, say an average part, I'm just using $100,000, I'm not saying that these parts generate $100,000 because that's information we don't disclose. But if it were a $100,000 part we would expect to see $25,000 the first -- revenue of 25,000 the first year to $33,000, the second year $50,000 to $66,000, the third year $75,000 to -- you know.

And then by the end of the fourth year we would expect a stabilized revenue stream of $100,000. That's the general run. Now obviously parts that enter the stream early in the year, they might be slightly more, and the parts that enter in the last month of the year we won't see any revenue. But if you take the average of what we call a graduating year, that's all the parts that we make in one year, I would say 25% to 33% will kind of get into the revenue stream.

Terrific. Looking forward to seeing you guys next year for my conference (inaudible).

Yes, we will be there. We'll look forward to it. And thank you, Jim.

At this time I would like to turn the conference back over to Mr. Mendelson for closing remarks.

Thank you. I want to thank all of you for your interest in HEICO. We remain available to you by telephone or e-mail. If you have further questions, Tom and I, the four of us are available. And as Jim Foung mentioned, we'll be up in New York in the first week in September at the Gabelli conference presenting there and we have a number of conferences throughout the year that we present at, New York, Boston, Chicago, LA, San Francisco and so forth.

Otherwise, if we don't speak to you, we wish you a good Labor Day holiday and we look forward to speaking to you towards the end of December when we have the Q4 results that will be available. So, thank you again. And we'll be in touch soon.

Thank you, ladies and gentlemen, that does conclude today's conference call. You may now disconnect your lines.