HEICO Corp (HEI) 2011 Q2 法說會逐字稿

Good morning. My name is Phyllis and I will be your conference operator today. At this time, I would like to welcome everyone to the HEICO Corporation's second quarter fiscal 2011 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. I would now like to turn the conference over to Mr. Laurans Mendelson, Chairman and CEO of HEICO Corporation. Sir, you may begin your conference.

Thank you very much. And good morning to everyone on the call. We thank you for joining us and welcome you to this HEICO second quarter fiscal 2011 earnings announcement teleconference. 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 Tom Irwin, HEICO's Executive Vice President and CFO. Before we begin, Victor Mendelson will read a statement.

Thank you. Good morning. Certain statements in today's conference call will constitute Forward-looking statements which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those 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; and HEICO's ability 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, telecommunications and electronics industries, which could negatively impact our costs and revenues. Those listening to today's call are encouraged to review all of our 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 second quarter operating results in detail, I would like to take a few moments to summarize the highlights of another record-setting quarter. Our consolidated second quarter and year-to-date net sales and operating income represent all-time record quarterly and 6-month results for HEICO. And this was driven principally by record sales and operating income within our Flight Support Group, as well as continued strong earnings in our Electronic Technologies Group. One other note. Our earnings per share on an as-adjusted basis, meaning adjusted for our recent stock split, were also record numbers for us. So we have set a number of records in this quarter.

Consolidated second quarter net income and operating income are up 34% and 27%, respectively. On a 20% increase in net sales over the second quarter of last year. In addition, our consolidated operating margin improved to 17.8% for the second quarter of '11, up from 16.9% a year ago. Flight Support set record net sales for the second quarter of '11, improving 30% over the second quarter of the prior year. And the increase in net sales reflects a strong organic growth of approximately 20%, as well as additional net sales contributed by the acquisition of Blue Aerospace in December 2010. Net income per diluted share increased by 33% to $0.40 in the second quarter of '11, up from $0.30 in the second quarter of '10.

In March 2011, as you all know, we declared a 5 for 4 stock split, reflecting the Board of Directors' continued confidence in the growth of our business. The additional shares were distributed in April 2011. And all applicable share and per share information has been retroactively adjusted to reflect this stock split. The split marks HEICO's 12th stock dividend or split since 1995. Our Board also reported in March that absent changes in the Company's business outlook, the Board intends to continue the Company's regular semi-annual cash dividend at $0.06 per share. And this would represent a 25% increase over the prior semi-annual per share amounts of $0.048 cents, adjusted for these 5 for 4 stock splits.

I would like to mention that we are very proud of our VPT subsidiary, and VPT received the Platinum Excellence award from L3 Communications. And this outstanding award recognizes DPT as a unique and outstanding supplier to L3. And I point out that only 2 out of 1,200 suppliers to L3 received this award. It gives you an idea of the quality and consistency that our subsidiary companies do achieve in the marketplace.

Our cash flow and balance sheet continue to remain very strong. Cash flow from operating activity was $51.1 million for the first 6 months of '11, representing 151% of net income. And that's up from $40.3 million for the first 6 months of fiscal 2010. As of April 30, 2011, HEICO had no net debt outstanding, as our cash and cash equivalents exceeded our total debt. Our strong balance sheet and debt capacity offers us great opportunities to continue to acquire well-managed businesses, which will be profitable to the future of HEICO. And of course we are working in that direction.

Moving on to the details, our net sales, consolidated net sales for the second quarter of '11 increased 20% to a record $184.5 million. And this was up from $153.8 million for the second quarter of 2010. In the first 6 months of '11, consolidated net sales increased 24% to a record $358.7 million, up from $289.4 million in the second quarter of '10. Flight Support reported record net sales of $133.8 million for the second quarter of '11. And this was up 30% from $103 million in the second quarter of '10. In the first 6 months of '11, net sales of Flight Support increased to a record $254.4 million. And that was up 29% from the $196.8 million in the first 6 months of 2010.

Flight Support second quarter and first 6 months of 2011 net sales increases are primarily attributed to organic growth of approximately 20% and 22%, respectively, as well as additional net sales contributed by the acquisition of Blue Aerospace in December 2010. Net sales of Flight Support have now increased over each of the past 5 quarters. The organic growth of Flight Support principally reflects higher sales of new products and services, and an increase in demand for the Flight Support Group's after market replacement parts, as well as repair and overhaul services. And this is consistent with current airline operating levels. We do believe the higher demand experienced during the first 6 months of 2011 is the result of both increased airline capacity as well as more stable financial conditions within the aerospace industry.

Electronic Technologies reported net sales of $51.4 million in the second quarter of '11, up from $51.1 million in the second quarter of '10. And the net sales of ETG increased to a record $105.3 million for the first 6 months of '11, and that was up 13% from the $93.1 million in the first 6 months of 2010. This principally reflects organic growth of about 6%, and additional net sales contributed by a fiscal 2010 acquisition. The 6% organic growth in ETG reflects strength in demand for certain of our defense, space and electronics products. As discussed in prior calls, the revenue and profits of ETG can fluctuate from quarter to quarter, based on the timing of customer orders or delivery requirements as well as variations in product mix. As you may recall, we reported that organic growth was abnormally high at 12% in the first quarter of 2011. And historically these quarterly fluctuations have leveled out over the full fiscal year. Our net sales by market in the first half of 2011 were composed of approximately 62% from commercial aviation versus $64 million in the first 6 months of 2010, 22% from defense and space in 2011 and 2010, and 16% from other markets including medical, telecommunications and electronics versus about 14% in 2010.

Moving on to our operating income, consolidated operating income in the second quarter of '11 increased 27% to a record $32.9 million. That was up from $26 million in the second quarter of '10. And increased to 29% to a record $65.3 million in the first half of '11, and that was up from $50.5 million in the first half of 2010. This reflects higher operating income in Flight Support in both periods and higher operating income in ETG for the first half of 2011. Flight Support reported record operating income of $23.4 million for the second quarter of '11, and that was up 46% from $16.1 million in the second quarter of '10. Additionally, Flight Support reported record operating income of $43.8 million in the first 6 months of fiscal '11, up 34% from $32.8 million in the first 6 months of 2010. The increases in operating income in the second quarter and the first 6 months reflect higher sales volumes and improved operating margins. As well as my belief that our team members have done an incredible job in the marketplace. And I happen to be very, very proud of the whole team, starting with Eric, and going down to the person who is sweeping the floor at one of our smallest facilities. This is an extraordinary accomplishment, in my opinion.

Operating income at ETG remains strong at $13.6 million for both the second quarter of '11 and '10. And additionally, operating income in Electronic Technologies increased to a record $29.2 million in the first 6 months of '11, up 18% from $24.8 million in the first 6 months of 2010, reflecting higher sales levels in the first quarter of '11. In view of some of the drop in defense spending and so forth, I think this is truly an extraordinary accomplishment in the management of ETG. And ETG is an enormously profitable operation for us, as you all know.

Corporate expenses in the second quarter of '11 increased to $4.1 million from $3.7 million in the second quarter of '10. And it increased to $7.7 million in the first half of '11, compared to $7 million in the first half of '10. But it declined as a percentage of net sales to 2.2% for both the second quarter and the first half of '11, down from 2.4% for the respective periods in 2010. And of course this is a very good accomplishment and it shows that the Company is very careful in husbanding its expenditures and resources. Operating margins, consolidated, improved to 17.8%, and 18.2% in the second quarter and first half of '11, respectively, up from 16.9% and 17.5% in the respective periods of the prior year. Operating margins of Flight Support improved to 17.5% in the second quarter of fiscal '11, up from 15.6% in the second quarter of '10. And improved to 17.2% in the first 6 months, up from 16.7% in the first 6 months of 2010. The improved operating margins in the second quarter and first 6 months of 2011 principally reflect the efficiencies realized through higher sales volume. Operating margins of ETG remained strong at 26.6%, for both the second quarter of '11 and '10. And improved to 27.7% for the first 6 months of '11, up from 26.6% in the first 6 months of '10. Principally this was a result of a more favorable product sales mix and higher sales levels in the first quarter of 2011.

Diluted earnings per share increased 33% to $0.40 in the second quarter of '11, up from $0.30 in the second quarter of '10. And increased 38% to a record $0.80 in the first half of '11, up from $0.58 in the first half of '10. As previously reported, the first half of fiscal '11 includes a $0.02 per diluted share benefit which we reported in the first quarter of '11 from the retroactive extension of the R&D income tax credit. All fiscal '10 and '11 diluted earnings per share amounts have been retrospectively adjusted for the 5 for 4 stock split which was distributed April 2011. Depreciation and amortization expense remained level at $4.6 million, both the second quarter of '11 and '10. And $8.9 million in both the first half of '11 and '10. R&D expense increased 14% to $6.1 million in the second quarter of '11, up from $5.4 million in the second quarter of '10. Our investment in new products and services grew to $11.7 million in the first 6 months of '11, up 12% from the $10.5 million in the first 6 months of fiscal '10.

Significant ongoing new product development efforts are continuing at both Flight Support and ETG, as we invest about 3% to 4% of each sales dollar, and each group has experienced double-digit spending increases for the second quarter and first half of '11 over the prior year. And I'd point out the obvious to you, that this is in spite of record earnings which we were able to achieve. Our effective strategy in the last 20 years has been to increase the R&D expenditures and provide new products and services at lower cost to our customers, which in turn facilitates market share growth and this helps us to meet our growth goals.

SG&A expenses were $33.5 million in the second quarter of '11 compared to $27.7 million in the second quarter of '10. And they were $65 million in the first half of '11, compared to $53.2 million in the prior year. The increase in SG&A are mainly due to higher operating costs, principally personnel related, associated with what I discussed earlier, growth in net sales and including acquired businesses. SG&A expense as a percentage of net sales of 18.1% in the second quarter of '11 approximated the 18% reported in the second quarter of '10. And SG&A expense as a percentage of net sales decreased from the 18.4% in the first 6 months of '10, down to 18.1% in the first 6 months of '11. And this principally reflects the impact of higher net sales volumes on the fixed portion of SG&A expense.

Interest expense in the second quarter and first half of '10 and '11 was not significant due to our extremely low debt levels and very low interest rates which we pay under our revolving credit facility. I earlier mentioned that we had no net debt outstanding April 30, 2011, because our cash and cash equivalents exceeded our total debt. Other income in the second quarter and first half of '10 and '11 was not significant, and I won't comment on it. Income taxes. The effective tax rate decreased to 33% and 31.7% for the second quarter and first half of '11. And this was down from 35.1% and 35% n the second quarter and first half of 2010. And the decreases principally reflect the benefit of a tax credit for qualified R&D development activities resulting from the retroactive extension of what's known at Section 41 of the Internal Revenue Code. And this was passed in December 2010 to cover the period from January 1, 2010 to December 31, 2011. I previously mentioned the retroactive extension allowed us to recognize an R&D tax credit for the last 10 months of fiscal '10 in the first quarter of '11, which net of expenses increased net income per diluted share by about $0.02. The reduction in our effective tax rate also reflects a lower overall effective state tax rate.

Net income attributable to non controlling interest totaled $5.3 million in the second quarter of '11, compared to $4.3 million in the second quarter of '10. And $10.7 million in the first half of '11 compared to $8.6 million in the first half of '10. The increase in both periods is principally related to higher earnings of Flight Support in which a 20% non controlling interest is held, of course, by Lufthansa. And additionally the increase in the first 6 months of '11 over '10 is attributed to higher earnings of certain Flight Support Group subsidiaries in which non controlling interests do exist.

Moving on to the balance sheet and cash flow. I earlier mentioned that our financial position and cash flow remain very strong. Cash flow from operating activities the first half totaled $51.1 million, including $27.5 million generated in the second quarter of '11. And that was up from $40.3 million in the first half of 2010. Working capital remained very strong. The ratio was 3.2 on April 30, '11, and October 31, '10. DSOs of receivables decreased to 49 days as of April 30, down from 50 as of October 31, 2010. And of course we work very hard to limit our credit risk and we regularly monitor all of the receivables and we enforce strong collection efforts.

Inventory turnover, April 30, 2011 was 116 days, down slightly from 117 in October of 2010. And this reflects efforts to prudently manage our inventory levels and preserve cash for other purposes. No one customer accounted for more than 10% of sales, net sales. And our top 5 customers represented approximately 18% of consolidated net sales in both the second quarter of '11 and '10. CapEx in the first half was approximately $3.8 million which is at a run rate slightly below our current estimate of $10 million to $12 million in the full fiscal 2011 year.

Looking forward, our outlook, we believe that our Flight Support Group's markets, the commercial airline industry generally expects a continued increase in capacity and maintenance levels during the remainder of fiscal 2011. While we recognize that uncertainty has been raised by higher oil prices recently, and that may moderate organic growth over the remainder of 2011, we do continue to expect year-over-year sales growth in Flight Support to occur. In ETG group's markets, we generally anticipate stable or increasing demand for our product. Based on this aviation market outlook and conditions within our other major markets, we are increasing our estimates of full year 2011 growth in net income to approximately 20% over the prior year. And growth in net sales approximately 18%, up from our prior growth estimates of 15% to 17% in net income, and 13% to 15% in net sales.

We further expect our consolidated operating margin for the full fiscal year of 2011 to approximate the full fiscal year '10's operating margin of about 17.7%. In addition to new product development, strategic acquisitions complementing our existing operations are an important element of our long-term growth strategy. And the aforementioned estimates exclude the impact, if any, of potential acquisition opportunities. Cash flow provided by operating activities expected to remain strong at about $95 million to $100 million in fiscal 2011. In closing, let me say that we believe that our continued focus on developing new products and services, increasing market penetration, taking advantage of our strong financial position and maintaining our disciplined acquisition strategy will provide for significant opportunity for earnings growth and to continue to create shareholder value. That is the extent of my planned remarks and at this time I would like to open the lines for questions from the listening audience.

(Operator Instructions) Tyler Hojo with Sidoti & Company.

Good morning, everyone. First question, it looks like Blue Aerospace contributed about $10 million in the quarter. Just wondering, that looked pretty strong. Is that kind of a normal run rate or how do we think about the performance of Blue?

Tyler, this is Tom Irwin. You are correct. The revenue contribution of the acquisition was just a little bit under $10 million. That was a slightly higher run rate than we project for the full year but, again, we're not excluding that opportunity going forward. That maybe be a little more than-- that was obviously close to a $40 million annualized run rate. That's a bit higher than they have historically run.

Anything specific that drove the performance or just business as usual?

Just generally demand. Of course, they're servicing principally the foreign military. And there was some unusually high demand that probably benefited them a bit in that particular quarter. And going into the transition of post-acquisition conversions, et cetera, through the first quarter. Some of it might have transferred into the second quarter. Eric can add some more color.

This is Eric. Also as you know, one of the attributes of all of HEICO's businesses is agility and responsiveness. And the Blue team really jumped on a number of opportunities. They were way out there, focusing on all these things, focusing on the details, not letting anything slip through the cracks. And they just performed in an outstanding way. So we never know what any of the businesses are going to do but we do know that their yield is very high because of, again, this attention to detail and I think that's really why they outperformed.

Tyler, one other comment. This is Larry. It's obvious that we have been extremely pleased with the performance of the management at Blue. We liked them from the time we met them. We thought that they would be great performers, putting forth a great effort, and they did. We had to single out Blue because Blue is an acquisition, so it stuck out like a sore thumb, and we had to mention it, because it was different from the prior year. But I can tell you that we get performance like this from a number of the subsidiary companies. The management at Blue is outstanding and there are a number of companies in the HEICO group that have similar kinds of extraordinary managements, that if we broke out all the detail, you would see they all do an incredible job.

It's nice to see. Just as a follow-up question, you did about 20% organic growth in Flight Support. And I'm just wondering, as of the last quarter you guys had not seen any signs of inventory restocking or a reversal of deferred maintenance. Any changes there?

Yes. I would say while we have not seen any classic restocking, we don't believe we've seen that. We have seen an increase in maintenance expenditures, maintenance levels, consistent with the operating levels of the world's aircraft fleet. So, the aircraft are being used, they're being maintained. I don't think many opportunities exist any longer to defer maintenance. So, therefore, they're having to perform the maintenance consistent with the fleet. We do not, however, see an increase in restocking. We do not see an increase on the number of months on hand that airlines want to maintain. Many of them are still living hand to mouth. But definitely the maintenance cycles are catching up with them and they just have to be performing now a higher level of maintenance.

Okay. Do you expect to see inventory restocking hit your business at some point in, say, the next year or so?

It's very hard to say when it will hit because we really don't know. I think what happens is as the economy tightens up and airline managements don't want to have any delays or cancellations, they start sending out the message to make sure that they have been insured against that at all levels in the operation. And I think that's when the increased stocking occurs and it probably occurs slowly, if you will, over a cycle. But we don't see any management edict in any airlines to increase the months on hand at this point. So the answer is yes, I think ultimately it will come, but don't really have any idea when.

Arnie Ursaner with CJS Securities.

Good morning and congratulations on the results. I do have a question regarding the ETG group where your sales sequentially were flat. You high lighted the 6 month numbers but didn't break out the organic for the quarter. And I'm assuming it's down. So, first question is can you quantify how far down ETG was in the quarter organically, please?

Yes, Arnie. This is Tom Irwin. Organically, ETG, as you may recall, was up about 12% in the first quarter and is now year-to-date 6%. So, organically obviously it's a slight negative, flat to down 1% or something like that. But again, I'd remind you that we commented in our first quarter call that the organic growth at 12% in the first quarter we felt like on a full year really wasn't sustainable, based on the order backlog, et cetera. So it wasn't so much a negative in the second quarter as just the first quarter everything was hitting on all cylinders, if you will. I don't know if Victor has anything else to add.

Arnie, this is Victor. Other than to add, I think that we expect that to be higher in the back half of the year.

And to be fair to you guys, you've always highlighted it's a lumpy business by quarter, it's one of the reasons you typically don't give any quarterly views for exactly that type of reason but it does lead to my second question. When we were chatting with you guys after your February call, at that point in time there was uncertainty about procurement funding. It sounded like several customers were unclear about if they would move forward and if so, the timing of that. Now that we're 3 months later and the budgets are firming themselves up, what are you actually seeing in that business in terms of customer change? I know you don't give specific backlog numbers, but perhaps freshen up what you are seeing from your customers.

Yes. Fortunately, that seems to have broken through for the most part. And right now what we're hearing and seeing out of our customers is fairly positive. And we do have pockets of weakness here and there, but overall I'm fairly optimistic, based on what I'm hearing out of our companies and what they tell me they're hearing from the customers.

Final question is a very general one on acquisitions. It's been a pretty long period of time without you making a more important acquisition. Are you seeing changes in the pricing? Is the competitive environment for acquisitions changing? Do you see anything that would cause you to be less enthusiastic about the opportunity to enhance organic growth with targeted acquisitions?

This is Larry. I think that in the area that we operate, which is outside of the normal investment banking process where they have auctions and push the prices up to 9 to 12 times EBITDA. We don't play in that arena, as you know. The answer is we're seeing very good opportunities. We have a number of things in the due diligence process. As I've said to you many times and publicly, you never know if a deal is going to close or not close, but we're optimistic that we will make our normal -- we do between 2 and 4 acquisitions annually and that's historic. And I think that that's realistic and I think that our pricing for the product that we buy is pretty stable.

There are many opportunities out there. Of course, in the other arena where you have the auction process of investment banking firms, the prices are going through the roof. And I heard recently where they have financing of 7 times. We're back to 2006 and 2007 numbers. But we don't play in that arena, so I don't think we're going to buy much in that arena. In our arena, I think we're in good shape.

Steve Levenson with Stifel.

Good morning, everybody. I would imagine that some capacity additions and planes coming out from the airports where they were parked had an impact on the results this quarter. I'm just wondering what you're hearing, if you can tell us, from your carrier operators as to what they think their plans are going to be over the next 6-- I mean, I don't know how far you can go out, 6 to 18 months?

Steve, this is Eric. Sure, I'd be happy to answer. From what we've seen, yes, some of the aircraft have been brought back into service and some of those aircraft have needed maintenance. But I would say we haven't seen an enormous return to service. I think there's still a number of aircraft out there that are capable of coming back, depending on fuel prices, depending on the economy and demand. So, I think there's additional upside potential there right now. I think the sales that we have seen so far are basically for the current fleet that is operating.

This is Tom Irwin. There's still about 1,000 competitive parked aircraft that represent potential pent-up demand for after market recovery, if they're put back in service. So, that is an upside, if you will. Potential.

Okay. Thanks. And on ETG, do you find yourself in the programs that are less likely to be impacted by budget changes, because they're more intelligence, surveillance, reconnaissance technologies or upgrades and replacements? Or do you have concerns about the budget?

This is Victor speaking. Of course, we always have concerns about the budget, because we cannot be certain what Washington is going to do or the DOD, et cetera. But at this point I believe the acquisitions we've made, the companies we have in the group, have pretty good exposure to these kinds of programs that you mentioned. And right now we're feeling pretty good about the way we put the group together.

J.B. Groh with D.A. Davidson.

Congratulations on the quarter. Victor, it would be helpful, I think, if you could go into a little more detail on some of the other segments within your group -- medical, industrial -- kind of what you're seeing there. You gave some indication on the defense front, but maybe some details on the others?

Yes, sure. On the medical side, it's been pretty good for us, I think. We've had a nice recovery there, especially in products that serve the discretionary end of the market. So, for equipment that goes into systems that are used for unreimbursed procedures. That's been strong for us. For high voltage, other high voltage related products for medical like cable assemblies and so forth, that's been pretty good for us, as well. And the outlook for that is positive, at least at this point. And for general what I would call industrial, where we're serving maybe telecom and some other industrial markets and things like that, that's been a little bit softer in the last few months. I wouldn't call it anything remarkable. But it had been revving along for a while and it seems to have slowed a little bit.

Okay. And then maybe one for Eric. Just looking at some of the airlines peeling back some capacity increases, are you guys more sensitive to the short haul, long haul? What do you think is a bigger driver? And maybe you could just comment on your thoughts on what you've seen, that some of these airlines have peeled back these capacity increases just due to the fuel price environment.

I would say that we're pretty well distributed, with the exception that we tend not to be on the RJ, the small RJ engines. So, therefore, when Delta and some of the others announced significant CRJ-200 cutbacks, that does not impact our engine business. So, I would say in general, based on what I've seen, our portfolio has not been impacted as a result of these cutbacks.

Okay, good.

And with regard to narrow body, wide body on the heavy commercial aircraft, we're on both the engines as well as the components. Pretty similar split on those between narrow body and wide body, we're on both.

Thanks a lot. Congratulations on the results.

Ken Herbert with Wedbush.

Good morning, everybody. Just first, I wanted to see within ETG, last year you saw a similar trend in slight decline or essentially flat. But in terms of the operating margin, as you get some sales rebound in the second half of the year, Victor, that it sounds like you're anticipating, do we start to see sequentially margins improve in ETG? Last year I know the second half was stronger obviously than the first half. Should we be looking for a similar trend this year?

Ken, this is Tom Irwin. I would say going into the year we were targeting operating margins within Electronic Technologies Group somewhere in the 26% to 27%. We were a bit above that in the first quarter and about that in the second quarter. I would say for the full year, we're still targeting, again, based on a current book of business and mix and anticipated order flow somewhere in that 26% to 27%, which is down slightly from last year. But again, very, very high, and it's not, again, where we're in a situation where we're losing margin but rather a mix of a group of highly profitable margin business. And again, we're very comfortable staying north of 25% with the current mix of business and thinking that our folks are doing an excellent job in meeting the customer needs, deliveries, keeping up with the technology challenges, et cetera. I don't know if Victor has anything else to add.

Tom, I think that summarizes it well. I was just going to add, truthfully, I don't really study these margins that closely and split hairs for a few basis points here or there. It's not like we're in the grocery store business where a few basis point change can mean the difference between profitability and loss. Overall, I look at it qualitatively and within the noise level as it shifts around like this. And if you look back historically, this is how it's always been, both on top line and on margin, looking out for overall over the course of the year.

One other comment, adding to what Victor and Tom have told you. Within that group, we have different companies with different operations, and a lot depends upon the mix of sales and contribution from each of these subsidiaries. So, to really predict it's going to be higher or lower, with that kind of precision in 50, 80 basis points, it's not possible to do it. We know, as Tom mentioned, that at a 25% operating margin, which is for us pretty low, so we would rather tell the world, yes, we think 25% and then come in at 27% or 28% or whatever it might be. We really don't know. We can't do it that fast, because it depends upon the mix coming from these different operations. And then within those operations, if they ship in a month or if the shipment's delayed and so forth and so on. So, it's really difficult to pinpoint that.

Yes, I can appreciate that and there's certainly some timing and other issues that play a part in this business but that's very helpful. Thank you. On Flight Support, can you comment, with the 20% organic growth in the quarter? Was there much variability there between the traditional parts business and the repair business in terms of the growth?

Ken, this is Eric. No, I would say that both were up a similar number. We had been very successful l in both the parts side as well as the services side and they're comparable.

Okay. Great. And then just finally, Eric, within Flight Support, as you look out, again, as you look out this year, can you comment t at all -- I know you're making a pretty significant investment on the interior side as you continue to attack other parts of the plane and so forth. It seems like you've had some really good traction and success there. But could you just comment on your outlook for interiors as far as the legacy engine business for the remainder of this year and some of your thoughts around that?

Yes, I think the whole conversation around interiors has been largely overblown. It's the product of the airplane that passengers are most familiar with. So, they come through our facility or they come by our trade show booth and they can associate with a trade table or a seat part or an IFE part or something that goes in a galley or a lavatory. But it really is a relatively small part of our business. We think that there's a lot of opportunity there. We're continuing to go ahead and attack it. But the core of our business remains the components as well as the engines. So yes, we've seen a lot of success over on the interior side. It's grown from zero to a very nice business today and we see continued interest in that area.

While some people look at interiors and think it's a relatively not critical part, how critical can a tray table be or how critical can an overhead bin latch be. The answer is, extremely critical because if it doesn't close they can't take off. It's a no-go item. So the airlines are very sensitive to this stuff. Also, they want to make sure that you've got the grain, the sheen, the color down exactly correctly. They don't want parts to look different across the airplane. So, it actually becomes a much more complex endeavor than it appears to be on the surface.

It's relatively easy to get something 90% of the way but when you want to get it 100% of the way and you're dealing with airlines that are very focused on the product that they're delivering, especially in the premium class, we think that there is a lot of opportunity there. And you would be surprised on the amount of attention to detail that they put into an interior part versus a component part versus an engine part. They're very focused to make sure this is right. So, I think the interiors are going to continue to grow but the components and the engine parts will remain the bulk of our business.

Ken, this is Larry. Yes, a number of people have commented on interiors becoming a big part. Some people have even said it's 50%. It's nowhere near there. It's tiny in comparison to all of the other things we do. It's de minimis and it's profitable, it's a good line of business, but by no means is this going to take over the business. And by no means is this going to shave operating margins going forward. Anybody who thinks that is off the mark.

Okay, so safe to say that the non-engine part of the business, in terms of your new product development, continues to be -- I think you'd always said in terms of sales, much less than 50%, because of the legacy engine part of the business. But in terms of the new products, maybe greater than 50%. But of that non-engine part, interiors is just a fairly small slice?

Yes. I think that that's accurate. If you break it to engine and non-engine parts, but we're talking about mechanical parts. And of course, the profitability, it's all monopolistic pricing, as you know very well, and so the margin is the same on one part as on another. And although it may be -- and I don't know if it's 50/50, but a lower percentage of complete engine parts but a higher percentage of accessory parts. And then the cabin parts that we talk about is really de minimis. Profitable, very profitable, but it's not going to affect the bottom line operating margin or dilute it by any means.

Michael Callahan with Capstone Investments.

Hi, good morning, guys. Good quarter. Most of my questions have already been asked, but just a couple of quick things. You guys have said in the past that in the recovery stage of the cycle is when you guys tend to pick up some market share on the Flight Support side. It seems that, just judging by the growth rates, that is probably taking place, but is there any other factor to think about or any other color you could provide there?

Yes, this is Eric. Yes, what we say is that typically when the economy turns down, airlines get more focused on their cost savings, whether it's parts, repair, distribution, basically all of our offerings. And we get, if you will, specked in on additional product as the economy is getting weaker. Of course, we don't start seeing those sales until they deplete their inventories and have to go ahead and buy more. So, the answer is the increase that we're seeing today is a combination of existing parts sold to existing customers that are on the upswing, new parts sold to existing customers, and it's also new and existing parts to new customers.

So, I would say we're seeing all of it right now. I think we have the wind to our backs right now. There's a lot of enthusiasm for what we're doing. I think HEICO's credibility at the airlines is at a level that we've never seen before. I've been with the Company now almost 22 years and I've never seen this level of acceptance at the airlines and desire to continue to develop more new parts. So, I think, yes, we'll continue to see new parts to new customers and take market share that way.

Okay. Thanks. And then secondly, also on Flight Support, for PMA certification so far this year are we on track at this point? Have we hit a run rate that we saw last year or can you give any update?

I would say PMA -- all of our new products, whether it's PMA or DER repairs are at levels consistent with prior years, based on sales level potential. The sales level potential doesn't fluctuate all that much year to year.

Okay. Then just lastly, probably for Tom. We touched on acquisitions a little bit. There's really nothing in terms of debt left to pay off. If you can't find attractive acquisitions in the next 12 months or so, are there any thoughts on what to do with the excess cash flow in the event you can't find opportunities?

Mike, this is Tom Irwin. Again, as Larry mentioned, I think we're reasonably confident that we will see and continue to look at acquisition opportunities. And that is our top priority for our available cash. And historically we've been able to affect that strategy and I think we're confident that going forward we'll be able to do so. Timing is always a question but I think we're comfortable that there are good opportunities out there and that's the best use of our availability under our credit facility.

Dr. Herbert Wortham with Brain Power, Inc.

Good morning, Larry and the rest. What can I say? I've been with you 22 years, Larry. You and your team have been extraordinary. We currently have well over $100-plus million worth of your stock. And I want to compliment you for what you've done with this Company over the years. Many of the people on the line are new, but you have really carried the ball well beyond my expectations. So, I just wanted to get on line and just say that, thank you very much.

Herb, I certainly appreciate, one, your comments, and two, your vote of confidence. You've been a great shareholder and you understand the Company extremely, extremely well. For those of you on the line who don't know Herb, I consider him, not because he bought HEICO, but because he's a scientist and he's very, very brilliant. And he has great insight and he's a great business man, he's also been a great investor to HEICO and other companies. So, this is the first time you've ever come on the line and said anything publicly and your comments are really, really appreciated.

For those of you who have not known the Mendelsons, I've known them 40 years. I've watched the Mendelson boys grow up since they were less than teenagers. And let me tell you, this is an extraordinary family doing extraordinary things for our community and for all of us who have been their investors. Again, thank you very much, Mendelson family. And Tom Irwin, thanks for all you do. I'm going to sign off now.

Herb, you're a great friend and again, we appreciate those comments. They're too kind. Thank you.

[Rene Fleshner] with [Rene Fleshner Association].

Larry, Victor, Eric, Tom, Herb stole my thunder. But I just want to tell you I've known you as long, longer, I think, than Herb. Your performance has been spectacular. As you know, I've been a shareholder for I think 100 years, before you even bought it. And I don't know what to say. It's just extraordinary and I want to thank you. It's been wonderful and after you respond, I'd like to make one more comment.

My response, Rene, you have been a great friend and a great shareholder and a long-time HEICO shareholder and supporter. And have also, if I could tell the audience, you've made a lot of money doing it, as Herb has, and that's the purpose of investing. But you have been a great friend to the Company. The only thing I would like you to please explain to the listening audience, we didn't ask you to say these things. And I assure the audience that I haven't spoken to Herb in probably 3 or 6 months, so I certainly didn't ask him to do any of this. This is all extemporaneous. And we appreciate the compliments.

All I can do is say, after the compliments and after you've swelled our heads and so forth, all we have to look forward to is getting back to business. Victor and I have to go to an AIA meeting in Williamsburg and meet with all of the rest of the people in this industry. Eric and Tom go back to Florida where it's hot and humid and roll up their sleeves and just get to work. That's what we're going to do and that's what we always do. But thank you very, very much all of you for your kind comments.

You're very welcome. I would like to add one more comment. As you know, you'll see this coming, I'm looking at the analyst report yesterday from Wedbush and I heard the gentleman speak this morning. Their guidance yesterday was that it's over-valued at $50 a share, and they kept their price at $45. And I'm curious why they did that and if they feel any differently today.

If that's a question to me, I have --

it's not a question to you. It's a comment and if he cares to come back on, I would love to hear his answer. If not, you're just great guys, and thank you.

Just my comment, Rene, is we have no input with the analysts. We don't give analysts any information that we don't give to the general public. And that's what makes horse racing. HEICO is an expensive stock and we know that. It sells at the highest P/E multiple of, really, of all the aerospace companies. We believe it's because of the growth and the consistency and the track record and the quality of earnings. But not everybody buys HEICO and I understand that. So different people have different opinions of the value and I think the value will settle where it has settled.

In my travels over the years, I've met many, many people who say -- Gee, I love the Company, I love everything, but the price, the price, it's so high, it's so high. I can't argue with that. And other people say, look, we like to buy the highest priced multiple stocks we can, because those are the most successful ones. So, it's just a matter of opinion. In my opinion, it's a matter of their opinion. And I respect everybody's judgment. I can't comment. We appreciate the interest of all the investing public and the analysts that look into it, and some like us more than-- think it's greater value than others, that's all.

By the way, Rene. This is Eric. I can tell you in speaking with the analyst, and many of them come to our trade shows, visit the Company, of course, we attend their conferences, they've been very supportive. I would say the analysts, all of the analysts have been extremely supportive of the Company, really like the story very much, and are genuinely excited about our opportunity. So, sometimes things ebb and flow a little bit, but the analyst community in general, from what I've seen, actually in total has been incredibly supportive.

One other comment. In spite of the analyst who said that he thinks the value is $46 instead of $50, we do note that in spite of that, he doesn't say we recommend you sell it. So, he doesn't have a sell recommendation, which in of itself indicates that he thinks probably the future is very bright and so forth. That's the way that I interpret it also. So, I put a little positive spin on it. If he felt that it was over-valued, it was a sale, he would say no, now's the time to sell it. He did not say that. Again, I thank you for your friendship and your comments.

At this time, there are no further questions.

Okay. I want to thank everybody on this call for their interest in HEICO. We'll be talking to you again in the third quarter teleconference which will be sometime towards the middle or end of August. Our third quarter ends July 31 and we hope that we'll have continued good news for you. So, you all have a good summer vacation and we look forward to speaking to you in August. Thank you so much.

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