HEICO Corp (HEI) 2010 Q4 法說會逐字稿

Good morning. My name is Nicole, and I will be your conference operator today.

At this time, I would like to welcome everyone to the HEICO Corporation fiscal 2010 fourth quarter and full year results conference call. (Operator Instructions)

I would now like to turn the call over to Mr. Mendelson to begin. Please go ahead, sir.

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 2010 and earnings announcement telecon. 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, 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 our foreign customers, or competition from existing and new competitors, which could reduce our sales, HEICO's ability to introduce new products and product pricing levels, which could reduce our sales or sales growth, HEICO's availability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest and income tax rates, and economic conditions within and outside of the aviation, defense, space, medical, and telecommunications and electronic industries, which could negatively impact our costs and revenues.

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

Thank you, Victor.

And now, before reviewing our operating results in detail, I'd like to take a few moments to summarize the highlights of our record-setting fourth quarter and full year results. Our consolidated fourth quarter and full fiscal 2010 net sales, operating income and net income represent all-time record quarterly and fiscal year results for HEICO, driven by record results within Electronic Technologies and improved results within Flight Support. Electronic Technologies set record sales and earnings for the fourth quarter of 2010, improving 27% and 20%, respectively, reflecting organic growth of approximately 7%, as well as additional contributions from an acquisition completed earlier this year and two in the prior year. Flight Support posted fourth quarter sales and earnings increases of 14% and 28%, respectively. And this marks the third quarter in a row of year-over-year and sequential increases in quarterly net sales, all of which represents organic growth.

Consolidated operating margins improved to 17.5% in the fourth quarter of 2010, up from 16.8% in the fourth quarter of last year. Consolidated fourth quarter net income and operating income increased 34% and 23%, respectively, on an increase of 18% in net sales over the fourth quarter of last year. Net income per diluted share increased by 31%, to $0.46 per diluted share, in the fourth quarter of 2010, up from $0.35 per diluted share in the fourth quarter of 2009.

Our cash flow and balance sheet remained extremely strong, and cash flow from operating activities was $102 million in fiscal 2010, representing 185% of net income, up from $76 million in the prior year. As of October 31, the Company's net debt to shareholders equity ratio was an extremely low 1.4%, with net debt, which is total debt less cash, of $7.7 million. We have no significant debt maturities until 2013.

2010 marks the fifth consecutive year that HEICO has been included in the list of Forbes 200 best small companies, and the first year HEICO was named as one of the best 100 small companies by Forbes magazine. Also, during fiscal 2010, we distributed a five-for-four stock split in April, and increased our semiannual cash dividend by 25%, effective with our July cash dividend, which was HEICO's 64th consecutive semiannual cash dividend since 1979.

Now moving on to the specific items in the financial statement, consolidated net sales increased 18% in the fourth quarter of 2010, to a record of $169.4 million, and that was up from $143.6 million in the fourth quarter of 2009. Consolidated net sales increased 15%, to a record $617 million in fiscal 2010, up from $538.3 million in the prior year. The fourth quarter results reflect growth in both ETG and Flight Support.

ETG reported record sales of $58.4 million in the fourth quarter of 2010, up 27% from the $45.8 million in the same period of 2009. Net sales of electronic technologies in fiscal 2010 increased to a record $205.6 million, up 43% from the $143.4 million in fiscal 2009. The fourth quarter and full year net sales increase within ETG represents strong organic growth of approximately 7% and 12%, respectively, as well as net sales totaling approximately $9 million and $40 million, respectively, contributed by the previously mentioned acquisitions. The organic growth in Electronic Technologies principally reflects strength in consumer -- customer demand -- for certain of our medical equipment, defense, and electronic products.

Flight Support reported net sales of $111.2 million in the fourth quarter of 2010, up 14% from the $97.9 million in the fourth quarter of 2009. Flight Support's net sales for fiscal 2010 increased to $412.3 million, up 4% from the $395.4 million in fiscal 2009. The fourth quarter and full year net sales increase within Flight Support was entirely organic, reflecting the capacity growth of our commercial customers -- airline customers -- during the third and fourth quarters, as well as improved demand in our industrial markets.

Our net sales for fiscal 2010 by market was composed of approximately 62% from commercial aviation, versus 68% in 2009, 23% from defense and space, versus 20% in 2009, and 15% from other markets, including medical, telecommunications and electronics, versus 12% in 2009.

Moving now to the operating income, in the fourth quarter consolidated operating income in 2010 increased 23%, to a record $29.7 million. That was up from $24.1 million in the fourth quarter of 2009, and it increased 24%, to a record $109.2 million in the full fiscal 2010, up from $88.3 million in fiscal 2009. These earnings increases reflect the growth in both ETG and Flight Support. The operating income of ETG in the fourth quarter of 2010 increased 20%, to a record $16.2 million, up from $13.5 million in the fourth quarter of 2009, reflecting the organic sales growth and impact of the fiscal 2010 and 2009 acquisitions. Electronic Technologies operating income in the full fiscal 2010 increased 40%, to a record $56.1 million up from $40 million in fiscal 2009, and this reflects the 12% organic sales growth as well as the impact of acquisitions. Operating income of Flight Support in the fourth quarter of 2010 improved to $17.6 million, and that was up 28% from the $13.7 million in the fourth quarter of 2009. Flight Support's operating income in the full fiscal 2010 increased 13%, to $67.9 million, and that was up from $60 million in fiscal 2009. And these earnings improvements are a result of both higher operating margins and higher sales.

Corporate expenses in the fourth quarter of 2010 increased to $4.1 million from $3.1 million in the fourth quarter of 2009, and increased to $14.8 million in fiscal 2010 compared to $11.7 million in fiscal 2009, but they remained under 2.5% of net sales. The increases are primarily due to the higher levels of accrued performance awards, based upon the improved consolidated operating results in 2010.

Operating margins of ETG continued to be very strong, at 27.7% for the fourth quarter of 2010. That was compared to 29.4% for the fourth quarter of 2009, and ETG operating margins in the full fiscal 2010 were 27.3% , and they approximated to 27.9% reported in fiscal 2009. The slight decrease in operating margins reflects variations in product mix, including the impact of certain recent acquisitions. Operating margins of Flight Support improved to 15.8% in the fourth quarter of 2010, up from 14% in the fourth quarter of 2009, and improved to 16.5% in the full fiscal 2010, up from 15.2% in fiscal 2009. The increases reflect the impact of higher sales volumes, as well as a more favorable product sales mix.

Our consolidated operating margin in the fourth quarter and the full fiscal 2010 improved to 17.5% and 17.7%, respectively, and that was up nicely from 16.8% and 16.4%, for the fourth quarter and full fiscal 2009. Principally, this was a result of the higher margins within Flight Support.

Diluted earnings per share, as you already know, increased 31%, to $0.46 per share, in the fourth quarter of 2010, and this was up very nicely from $0.35 per share in the fourth quarter 2009, and increased 23%, to $1.62 in fiscal 2010, up from $1.32 in fiscal 2009. Depreciation and amortization expense increased to $17.6 million in the fiscal 2010, up from $15 million in the prior year. The increase for the full year reflects higher amortization expenses related to the intangible assets acquired as part of the previously discussed acquisitions completed in the ETG group.

Research and development expense increased 25%, to $6.2 million, in the fourth quarter of 2010, up from $5 million in the fourth quarter of 2009, and our investment in new products and services grew to $22.7 million in fiscal 2010. That was an increase of 15% over the same period in 2009. The effective strategy for the last 20 years has been to increase these expenditures in R&D, and that allows us to offer lower-cost products to our customers, which in turn facilitates market share growth. Our Flight Support Group added approximately 700 new PMA's and DER repairs in fiscal 2010, and we're targeting similar numbers for 2011. Significant ongoing new product development efforts continue, of course, within Electronic Technologies as well, and we are now budgeting $24 million in R&D spending in fiscal 2011, and that would be an increase of about 6% over 2010.

SG&A expenses were $31.4 million in the fourth quarter of 2010, compared to $24.7 in the fourth quarter of 2009, and they were $113.2 million in fiscal 2010, compared to $92.8 million in fiscal 2009. These increases are due principally to higher operating costs supporting the growth in consolidated net sales, primarily personnel related, and the additional SG&A operating costs associated with the ETG acquisitions which I previously mentioned. SG&A spending as percentage of net sales was 18.5% for the fourth quarter of 2010, compared to 17.2% in the fourth quarter of 2009, and it was 18.3% in full fiscal 2010, compared to 17.2% in fiscal 2009. The increases principally reflect the higher level of accrued performance rewards -- awards -- based upon the improved consolidated operating results.

Interest expense in the fourth quarter of both years was not significant, due to our low debt levels and very low variable interest rate under our revolving credit facility. Our outstanding debt balance was only $14 million, as of October 31, 2010, and an interest rate was under 1%.

Other income in both years was not significant. HEICO's effective tax rate decreased to 32.8% in the fourth quarter of 2010, down from 36.2% in the fourth quarter of 2009, and increased to 33.7% in the full fiscal year of 2010, up from 31.9% for fiscal 2009. The increase of 1.8% in the full year effective tax rate principally reflects the expiration of the R&D income tax credit in the current year, the benefit of the audit settlement in the prior year, and a higher effective state income tax rating in the current year, reflecting the impact of some recent acquisitions. Net income attributable to controlling interest totaled $4.2 million in the fourth quarter of 2010, compared to $3.6 million in the fourth quarter of 2009, and it totalled $17.4 million in fiscal 2010, compared to $15.3 million in 2009. These increases are attributable, of course, to the higher earnings of certain Flight Support Group and Electronic Technology Group's subsidiaries, in which the non- controlling interests exist.

Now, moving over to the balance sheet and cash flow. As I said earlier, our financial position and cash flow remain very strong. Cash flow from operating activities was a very strong $33.8 million in the fourth quarter of 2010, bringing the full fiscal 2010 total to $101.7 million, and this was up from $75.8 million in fiscal 2009. Our working capital ratio, of course assets divided by -- current assets divided by current liabilities, remained very strong at 3.2 and -- at October 31, and they were 3.7 as of October 31, 2009. DSO's of accounts receivable were 50 days in both periods October 31, 2010 and 2009. And of course, we continue to work hard to limit our credit risk through regular monitoring of all receivables, and our very strong collection efforts. Our inventory turnover rate October 31, 2010 improved to 117 days, down from 133 days in October, 2009. This reflects continuing efforts, of course, to manage inventory levels, while at the same time meeting customer delivery requirements. No one customer accounted for more than 10% of our net sales. Our top five customers represented approximately 18% of consolidated net sales in 2010, compared to 20% in 2009. CapEx in fiscal 2010 were approximately $8.9 million.

Now let's look forward. As we look forward to fiscal 2011, we are seeing continuing signs of improved product demand within our commercial aviation markets, which represent over 60% of our consolidated net sales. This improved demand appears sustainable, especially in light of the expected increase in capacity in the commercial airline industry during 2011, and this should positively impact HEICO. In our electronic defense and space markets, we are pleased with increasing demands for some of our commercial products, and overall stable demand for our defense products. Based on our current market conditions within aviation and other major markets, we are estimating growth in fiscal 2011 full year net sales and net income of approximately 10% to 12% above 2010 levels, with consolidated operating margins for the full fiscal year approximating the fiscal 2010 operating margins. These estimates exclude the impact of potential acquisition opportunity.

As you all know, in addition to new product development,strategic acquisitions that complement our existing operations are an important element of our long-term growth strategy. Consistent with this strategy and our long-term growth goals, we continue to target net income growth of 20%, inclusive of the impact of acquisitions. But it is too early, at this time, for us to make such a prediction for fiscal 2011. One comment, those of you who know HEICO well, know that historically our organic to acquired growth has been about 60/40, 60 organic, 40 acquired. And we target basically 50/50. So I think what we're saying, if we can hit our 20% target, 10% to 12% would be 50% to 60% of the 20% would be organic, and the balance would be acquired, and this is typical of our performance over the last 15 to 20 years. Cash flow provided by operating activities is expected to remain strong and approximate $90 million to $100 million in fiscal 2011. Our CapEx in 2011 are budgeted between $10 million and $12 million.

In closing, I'd like to thank our team members -- HEICO team members. It is through their dedication and efforts that we have achieved our significant growth record. We believe that our focus on developing new products and services, and increasing market penetration, while maintaining our strong financial position and disciplined acquisition strategy, will provide continuing opportunities for continued substantial growth and profitability, and to continue to create shareholder value.

That is extent of my prepared remarks, and I would now like to open the floor for any questions which the listening audience may have.

Thank you, sir. (Operator Instructions)

Your first question is from Rama Bondada of the Royal Bank of Canada.

Good morning, gentlemen.

Good morning.

Quick question. Could you please provide some color on the end market assumptions that are baked into your guidance for next year?

The end market assumptions? Meaning -- in both groups, or one group?

Yes, in both groups, like your aerospace aftermarket assumptions, and then also what you are seeing in medical and in defense?

Eric will cover the FSG assumptions, and then Victor can comment on the ETG.

So, on the FSG assumptions, judging from what other manufacturers are seeing, they're expecting somewhere between a 5% and 7% increase for 2011. We have a very detailed budgeting process, whereby we go through all of our business units by customer, by part number, by product, and then we do a budget based on what their usage is and what current levels of inventory they have. So we've been able to roll all of that up, and that is what is baked into our current numbers.

So what is your traffic in your capacity growth numbers?

So, I would say it's comparable to what everybody else is expecting. Again, we just look at what the overall increase is, and we're not 100% sure whether it's coming from a little bit of restocking, capacity increase, or deferred maintenance. But I would say, just in terms of the traffic growth, probably in the 5% to 7% area.

And for the electronics group?

Yes. This is Victor, Rama.

Hello, Victor.

How are you?

We're looking for mid-single digits organic growth, in the Electronic Technologies Group, and it really varies by market, the overall, what we expect. And similar to the Flight Support Group, really have to drill down to individual products and programs that we're on. It doesn't really come from a macro view. We tend to do very bottoms up views and analysis.

Rama, also -- this is Eric. Just to expand on what I said, again, the budgets were put together a few months ago, and obviously, there's been a renewed vigor in the economy lately. So I would say, it was based on the information that we've received from our customers. To the extent that the customers have been, in fact, a little conservative on their estimates and their guidance and, then of course, that would be reflected in our numbers.

This is Victor. That would apply the same for the Electronic Technologies.

There's one thing, Rama, I want to emphasize to you and to the others listening. We think that we use a relatively conservative guidance system, because we don't try to project further than the orders that we may have on the books at any one time.

Let me give you an example. And this is not an example, don't take this to be specific. Let's say, for example, the budget is created between July and September, October of 2010. That's the 2011 budget. That is based upon a bottoms up review, as Eric told you, and we have some numbers. And that is what we would use as our guidance for 2011. Now let's assume for a moment that the month of November and half of December, which we are past now, that's behind us, we know what those numbers are. Well, if we assume that the month of November and early December was a great period, and we greatly -- or significantly exceeded the budget ,we don't reflect that in the guidance. Similarly, if November and part of December was very weak, we don't reflect that in the guidance. Why? Because a month to month and a half, we feel is not sufficient to really give us a strong feel. We can't interpolate that for the whole year. I mean, we could, if we were aggressive and if it was a very strong month, we could bump it up, but we would be -- we're too conservative to do that. So, we go pretty much by what the original budget was.

At the end of the first quarter, when we revise guidance, we will then have the benefit of the first quarter. We will know what it does, and we will have a better idea and, better or worse, we will adjust the guidance because we have a solid three months under our belt and we know we're going.

It is also our feeling, and this is just our basic conservative strategy, that when the earnings come out, they come out. We don't have to front run and jump ahead, and tell everything is going to be great, or bad -- We would rather be, as we were last year, err on the side of conservativism, because we can't guarantee what the results will be. And we would rather be conservative, and not to mislead people into thinking that earnings are ging to be up and then something happens, and people are disappointed. That's just the way we do it.

Sure. Sure.

Could you provide some more detail about segment margin expectations for FY 2011? I just want to get a better understanding of your guidance of flat margins for next year. I would suspect that there would be a margin improvement in FSG, given the ongoing airline traffic and capacity growth. So, what parts of the business are sort of diluting that margin expansion in the aerospace business?

Rama, this is Tom Irwin.

I would say, we see modest opportunity to grow the operating margins in FSG a bit. Again, not dramatically. We target getting back to the 17%,18%. We've previously spoken about that, and we'll move towards that. We wouldn't expect to get it back all in one year.

In the ETG, again those margins have been extremely strong. They ran about 27% operating margins in 2010, we again, target typically between 26% and 28%. The overall guidance numbers of relatively flat operating margin percentages might see a little bit of uptick on FSG and a slight downtick against still very, very strong operating margins in ETG. But if they go down to 26.5% or whatever, that would impact the weighting. We don't see any significant change in the corporate component, which is typically running under 2.5% of consolidated net sales.

Okay. All right. Great. Thanks a lot, guys.

The next question is from Arnie Ursaner of CJS Securities.

Hello. Good morning.

My questions basically are follow-ups to the questions you were just asked. The IATA data indicated capacity jumped 4% in the first ten months of this year, and they're predicting a 7.5%, or near doubling, in the next six months, and yet I believe your view was you only expect 5% to 7%. Can you reconcile those two numbers?

Arnie, it's Eric.

Our number was an annual number. If the six month numbers were as you said, and then the second six-month numbers were higher, our 5% to 7% is really an average. But again, I would get too wrapped around the axle in terms of capacity growth, because again, when we do our budget, which is again a by customer, by part number budget, and our sales folks aren't looking at the IATA capacity growth numbers when they're coming up with those budgets. So it's not in a company like ours, that tends to have relatively short visibility in terms of orders, we've got pretty short lead time, that kind of information isn't as relevant for us.

And going back -- again, one number I want to drill down on, perhaps in multiple ways, but the same issue is the sequential decline in FSG margin of over 100 basis points. You're getting a lot more revenue, yet your margins are going the wrong way. You're introducing a lot of new parts. And also embedded in this, you had built excess inventories in anticipation of client demand. I guess what I'm try to get a feel for, when you weigh all of these factors, you had much greater revenue growth but a sizable sequential decline in margin. Are the new products at lower margin, is the stuff that was in inventory at lower margin, what do you attribute the sequential decline in FSG margin, and how do we fix it?

Arnie, this is Tom Irwin.

Relative to FSG in the fourth quarter, again about a hundred basis point decline. That's about $1 million dollars. Most of that was two things. One, we do our full annual review of our inventory reserves based on not only our look back of historic sales, but also the outlook for the next 12 to 18 months based on our sales forecast. We increased our inventory reserves of some products about $600,000. The other would be, as we had our performance targets in some of the business units there was more than a prorata charge, if you will, for performance awards accrued in the fourth quarter. So, those two things, I think, hit in the fourth quarter, might have been spread in other quarters. But again, it's not that material.

But again, overall, we did show the operating margin improvement for the segment for the full year of 130 basis points or so. I think that's more significant than just that one quarter. There's nothing, in terms of underlying changes in margins, the new products versus whatever.

Okay.

And also, just to point out, the last year's --- compared to last year's fourth quarter, our operating margins are up 180 basis points. So it's typical to have some variation quarter to quarter. We think it's most important to look at the full year numbers.

Right.

And Larry, I guess a little more strategic -- if I look back at the actual acquisitions completed last year, for you it was, if anything, an average, maybe even a below average year, and yet we're in an environment where interest rates are extraordinarily low, the Fed is on full throttle ahead. Many companies are more comfortable having discussions. With hindsight, what do you think caused you to have a, if you will, below average acquisition year versus prior years, and do you expect that to change fairly soon?

As you know, Arnie, we are very disciplined. Some of the sellers coming off a week 2009 backed out of the market and they didn't want to sell. Companies that we look at felt that hey had a weak year. We base things on trailing numbers and they were reluctant to sell in a weak environment. They were really waiting for their earnings to come up. In fact, a lot of these companies that we follow, their earnings did pop back and we are in discussions with quite a number of companies. Again, I can never predict whether a deal will close. I am of the opinion that they will, and a number of them will happen, but I can't guarantee it. So we can't reflect that.

But I think the opportunities are certainly out there. Our inventory of deals that we're due diligencing right now is very full, and we have our teams doing a lot of due diligence on a lot of companies. At this moment, just seeing what's out there, I would be optimistic looking out in 2011. All I can tell you is, stay tuned because I think we're getting very close, but it's not until the final papers and the money is wired that the deal is done. But I feel like will have a stronger acquisition year in 2011 than we did in 2010, and we intentionally put wording in our press release and my comments this morning that say our target is still 20%. And it is. For my money, I hope it's higher than that. I think the outlook at this moment is very good, but we can't include it because it's not a done deal.

I think for decades you've proven your attention to shareholder value, and I think your shareholders appreciate that. I'll see you guys in January.

Thank you very much, Arnie.

The next question is from Steve Levenson of Stifel.

Good morning, everybody.

Good morning, Steve.

Tom, you were talking about an inventory reserve, and I don't know if I missed something, is that for slow moving parts or obsolete parts?

Slow moving, yes. Again, there is the high probability that we will sell them, but again, under our policy, if it's excess of so many months worth of usage, we reserve it. We don't get rid of it, we don't scrap it. But again, that's not a huge amount, but specific to that one quarter, it was a component of that million dollar swing in terms of operating margins with FSG.

Right. So, this is similar to what happened, I think, between first and second?

Exactly. This happened on other occasions, that we reserved. And then I think in the current fiscal 2010, it reversed this year. We reserved it last year, and it reversed partially in -- I don't recall right now whether it was the first -- I think it was the first quarter. But, yes, exactly.

Okay. Thanks.

And just a question on what you're hearing from customers. You've had the consecutive growth now for three quarters. Do you think a lot of that's related to restocking? . I know you said this is sustainable, but I guess I'm wondering is it sustainable at this sort of rate, or do you see an acceleration, as capacity grows?

Hello. This is Eric.

I think that most of the increase that we've seen is the result of increased demand actually going into the products. As everybody knows, the airplanes have been very full for the last six months or more, and I don't see any significant re-stocking going on, but I do see that the inventories were drawn down so low that they were really at unsustainable levels. But I don't think in our numbers we've got -- in the actual sales, nor in the forecast going forward, there is any appreciable re-stocking in there. If there is, it's significant restocking, I think that will be on the upside for us.

Okay. So, in other words, you think the customers probably still need to build up their inventories a little bit to handle --

Correct They don't have the inventories to fix what they've got to fix in the shops right now. So, I think they're using basically everything that we're shipping them.

Okay. Sounds good. Thank you.

This is a little accounting question, I guess for Tom again. Do you have an estimate on what the tax rate ought to be in fiscal 2011?

As I mentioned, the rate in fiscal 2010 wound up around 34%. With the changes in the tax laws and some changes in minority -- or noncontrolling interests that we'll be buying, it will probably be a more normalized rate of about 35%.

We often speak about the combined tax and noncontrolling, what used to be called minority owned, rates. This year it ran about 50%, combined. It was 34% and 16%. With the tax rate going to 35%, we're scheduled to buy some noncontrolling interest. We have already bought some, and so that would come down a little bit. Probably on a combined basis, the two charges, minority interest and taxes, will probably go down to about 49%. That's kind of inherent in our guidance numbers.

Got it. Thank you.

And I'm sorry I'm bouncing around here, but one last question, I guess, for Eric. Is there one or several particular programs that you find as real potential drivers for growth in the next year or two?

No, I wouldn't say that there's any one particular program. We're seeing very broad based strength in our sales, really in everything that we do. It's not confined to any one business unit or any one particular type of program. It really is very, very broad based. The airlines are now, fortunately, making money and they are stepping up and doing the maintenance that they've got to do. A lot of it had been deferred, but I would say it's just very stong across the board.

Great. Thanks very much, everybody. Happy New Year.

And to you, too. Thank you.

The next question is from J.B. Groh of D.A. Davidson.

Good morning, guys.

Most of my questions have been answered. But I just wanted to get a little clarification on the cash flow. I think -- I can't remember if it was Larry or Tom said the cash flow from operations for 2011 is $90,000 to $100,000, with CapEx of $10,000 to $12,000, correct?

That is correct. That is our outlook for fiscal 2010, correct.

And as usual when you give that CapEx number , I think, Larry, you say that's sort of a wish list number that would represent a max, right?

I think that that's a very realistic number. Internally, I can tell you that we have an approved budget which is higher than that, but historically we use half of what the approved budget. But we think that's a realistic -- a very realistic CapEx budget for the Company.

Before we approve anything, it goes through multiple layers of scrutiny, and return on investment, and everything else. So we're very, very tight in letting those CapEx dollars out. I think it's a very realistic number.

So you've got basically $80 million to $90 million in sort of free cash flow. What are your sort of scheduled minority interest purchases that you would have in 2011, based of the past deals that you did?

We would budget $10 million to $12 million. And of course, what really happens with the excess cash flow is we pay down the credit facility. But, as Larry mentioned, given our opportunities for acquisitions, effectively they would be -- the excess cash flow would likely go towards acquisitions.

Right. So you can do that all with just using free cash flow and maybe some short-term debt that gets paid down. Okay.

All right Thanks. That's all I had. Congratulations on the year.

Thank you very much, J.B.

Your next question is from Ken Herbert of Wedbush.

Yes. Hello. Good morning.

Good morning, Ken.

Hello.

I just wanted to drill down a little bit into the ETG segment. I know you talked about this. In your outlook for 2011, you mention commercial products. You're seeing increasing demand there, with overall stable demand for the defense side. What's the sensitivity around your defense exposure, and are there any specific areas that are maybe viewed as potentially greater risk or lower risk, underlying, essentially, the flat or stable demand heading into fiscal 2011?

This is Victor.

The answer is, I don't think we have any flashing red sirens or anything like that at this point. The products we produce, as you know, and our strategy, is to be on a broad cross section of programs, a number of which are still growing programs. For example, things that we do on the F-35, that really represents pretty much all upside to us, things that we do on the next generation of GPS satellites, which are pretty much locked in. That's mostly upside to us at this point. There's still upside, I think, on UAV programs, where we are in some of our companies.

So, we are kind of reacting in our anticipation, our predictions, to some of the more cautious predictions we're seeing out of analysts and the press, and not wanting to be too optimistic as to what we're going to see in that business. But there's nothing at this point that we've seen, where we're seeing cancellations or big flashing lights. So that's why we say we feel pretty good with our stable forecast. And if it does better, great. But right now we like the stability forecast.

In the meantime, of course some of our commercial markets, a number of them, are doing quite well and moving ahead, and that's how we get to this balanced view that we should see organic growth in the mid- single digits range.

Okay. That's helpful.

And then, just to get further clarification on, again for ETG, the sequential decline in the margin. I know the fiscal third quarter was particularly strong. As I think about this now heading into fiscal 2011, any additional insight or color you could provide on the sequential step down, but then more importantly in 2011, how we should be thinking about the margins within ETG?

I think you've heard me say before, it's a high margin business, and I'm really not looking for margin expansion. It's mix sensitive. Certainly, if we were to make an acquisition that were below our average, but still a high margin business, it could bring the margins down. I think we had a little bit of that at some point this year. But I feel comfortable telling people to look in the 27% range, 26%, 27%, 28%, somewhere in there. I just can't pinpoint it. And our view is, more or less, we have very good profitable businesses, and I don't quibble, if you will, too much with our people when it moves around in that range.

Okay. No, I mean they are obviously very strong margins.

Just if I could, to jump over to Flight Support . I know, obviously, coming off the last cycle, seven or eight years ago, coming off the trough, you had extremely strong topline growth . Can you just remind me again, what was the mix of the last cycle, in terms of the organic versus the acquisition growth, specifically within Flight Support? Because you obviously had some really strong, 30% to 40% numbers, 2004, 2005, 2006, in those years.

Ken, this is Tom.

In part, after the downturn, we had the impact of a significant -- coming out of that, we had the benefit of a dramatic fall-off from our JTAT business, post-911. So our growth -- I'd have to check the number, but it was probably half-and-half within Flight Support Group, maybe 60/40. So the organic growth was certainly higher than the 10% to 15%. But again, we were coming off a significant reduction in our JTAT mature products in the different market, if you will.

Okay. So as we look out to 2011 and into 2012 even over the next few years, from an organic growth standpoint, I guess realistically mid-teens kind of growth in Flight Support, on the top line? Even with the fact that this cycle hasn't been, perhaps the trough hasn't been perhaps as deep as in the prior cycle. Mid- to high teens seems sort of -- maybe mid-teens is implied in the guidance, to an extent, obviously with some variability there. But, how much upside, I guess, do you potentially see to that number, or is there anything you can specifically comment, from that standpoint?

Again, just in terms of what's in our guidance is a mixture, again, we have within Flight Support Group,roughly 60% of the revenue, round numbers, parts, which as we've spoken about in the past and as you're referencing, grows organically faster than the other portion of that business, which is the MRO services. The MRO services tends to grow more with the market. We typically do outgrow the market some, but not as dramatically as we do on the parts business, because there again we're adding 400 to 500 PMA parts per year,and so on and so forth. So if you weight organic growth in the mid-teens of one and more market growth on the other, then you come to somewhere about the 10% to 12% overall organic growth.

That's kind of what 's inherent in our guidance in fiscal 2011, and obviously going out, at this point, it's a little early, in terms of just to think about what 2012 specifically may look like, in terms of what market opportunities are.

I can tell you we're certainly pushing all of the team members at HEICO, and the team members are major shareholders of the Company, so they want to sell as much as they can possibly sell. And everybody is 100% focused on maximizing that number in every single one of our businesses. So I think it really depends on the strength of the recovery, and we'll certainly have greater visibility, greater clarity over the next quarter or two as we see what's going on with the economy.

Great. Thank you very much, and excellent quarter.

Thank you very much.

Your next question is from Jim Foung of Gabelli.

Hello. Good morning, everyone. Great quarter.

Jim, good morning. Thank you very much.

Most of my questions have been answered.

I just had one question regarding material costs. We've seen commodity costs moving up as the economy starts to strengthen. Could you just speak about how you're responding to higher material costs, where you might be seeing them, and if you're able to get high prices due to the increased cost?

Jim, this is Eric.

When we look at material costs, it is a relatively small portion of our total revenue number. You are right that material costs are going up in many areas. And to the extent that they have and impact on us, we're going to have to share that impact with our customers. So we're currently looking at that. But I wouldn't say that there's anything dramatic on that point right now.

What percent of that total revenue does material cost represent for you?

Yes, Jim, this is Tom.

For competitive reasons, we don't disclose it. Just like our OEM competitors don't disclose specifically. But again, as Eric said, it's not a material portion of our cost of sales, or therefore our revenue. But specific numbers, again, we'll decline specifics.

Okay.

When you do say [inaudible] pass them on to your customers.

It generally -- it depends on the nature of the customer's contract, that is if it's a longer-term contract , there's typically cost escalation. If it's a shorter term contract, then, in effect, we sort of recapture it, if you will, when we do our catalog price adjustments.

Okay.

And then maybe Victor could talk about, on the Electronic Technology side.

You're talking about --

The higher material costs.

I don't think at this point it's been that much of a factor. We also tend to use less metals, and so forth. So right now, we're not seeing it. We're not planning for it, at this point. Not that it couldn't happen, but --

Jim, in that business, the material content is certainly less, there's more intellectual content and brain power that goes into that, because the ETG group is really driven by high-tech design and engineering, and so forth. So, the plant equipment and material that you normally find in the manufacturing business is replaced with intellectual capital and things of that sort. Intellectual, almost intangible kinds of assets and costs, when it's in the Electronic Technology.

Now there are some businesses that we have, we have wiring businesses and high voltage engineering power lines and stuff like that, but it's not a significant portion.

Okay. Terrific.

Larry, just going back to your guidance, could we look at what you provided in the press release, that sales and net income growth of 10% to 12% in 2011, and operating margin the same as 2010. That's kind of like a baseline of what we can expect, just based on your orders on hand and what you see the business can do. And then we could see further growth, if there is acquisitions during the course of 2011?

I think that's accurate. I just want to clarify it.

We are working on a number of acquisitions. As I said earlier, we don't know if and when they will close. History tells us that some close and some don't. When and if they close, of course we'll announce them promptly.

The other thing is that if we have a strong recovery and the recovery is stronger than our people budgeted during the last quarter of 2010, then those numbers, I think, will be flowing through and we'll have better numbers. But at this point, it's too early to tell if that will happen. So we're going to be conservative, and go with the numbers that we feel very comfortable with. So I think we have less upside in our projection. You focused on those two upsides. I think you got it exactly right.

We hope that we're going to do better than what our guidance is and we have said that. We still target 20%. But it's too early in the year to come out and say, yes, we're going to definitely do it. We'll stick with our 10% to 12%. I think that we're very confident that we can do that. I would be, honestly, disappointed if we didn't do a lot better. But I can't guarantee it, at this point, and therefore, I don't want to stick our necks out and mis-guide.

Terrific. Terrific. That's a great quarter. Have a great holiday and a Happy New Year.

Jim, thanks, and the same to you.

(Operator Instructions) The next question is from Eric Hugel of Stephens.

Good morning, guys. This is Omear for Eric.

Okay, Amir. This is a question for Eric?

Fair enough. I've got a couple of quick questions for you guys.

How much of the 14% growth in the FSG business came from industrial versus the aerospace market -- end markets?

In the fourth quarter it was, round numbers, half-and-half.

Okay. Thank you.

And lastly, you guys mentioned your long-term organic versus acquisition sales growth mixed targets, but more specifically how much of the 10% to 12% sales growth in your guidance is organic versus coming from already announced acquisitions?

Yes. Inherent in our guidance are no future acquisitions. It does include the impact of one acquisition that we completed in fiscal 2010, but was only in there for a partial year, within the Electronics group, the impact of which is, of the growth forecast in fiscal 2011 and in fact about $6 million to $7 million will come from the impact of partially acquired revenue last year. The rest is organic.

Okay. Great. Thank you guys.

Thank you.

At this time, there are no further questions.

I like to make one final comment which, I'd like to impart a thought that was really was absent and should have been included in our comments earlier. And that is that, those of you who have been to HEICO's facilities around the country or in South Florida and have met the people that are working there, our team members, have all been impressed with their capability. But I want to emphasize to you that I think the success of HEICO is a direct result of the extraordinary people, team members, that we have at this Company. When you dig down and you see the people operating as Presidents, heads of companies, heads of divisions, these are people who are 24/7 guys and women who have done an extraordinary job, who continue to do it, and who receive excellent compensation for their performance, and the compensation is well deserved.

But, at the heart of all this stuff, we can talk about numbers and we can talk about margins and everything else, but it's the people that we have in place that are the performers. Most of them are not on the phone. Those who might be on the phone, I want to thank them and congratulate them, and I want all the investing public to understand what an outstanding group of people work for HEICO Corporation.

And that's my comment. I wish you all a very happy and healthy holiday and new year. And I guess we will speak to you the next time towards the end or middle of February when we come out with our first quarter results. So, those are my comments. Hello?

Yes, sir. You have no further questions.

Are there other questions?

There are no further questions.

Well, thank you. Good-bye.