HEICO Corp (HEI) 2012 Q1 法說會逐字稿

Okay. So, good morning to everyone and we thank you for joining us. We welcome you to HEICO's First Quarter Fiscal 2012 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 Tom Irwin, HEICO's Executive Vice President and CFO.

Before we begin, Christy, our operator this morning, will read a statement. Christy?

Welcome to the HEICO Corporation Fiscal 2012 First Quarter Earnings Conference Call. Certain statements in this 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 demand; export policies and restrictions; reductions in defense-based 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 products' pricing levels, which could reduce our sales or sales growth; HEICO's ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risks; interest and income tax rates; and economic conditions within and outside of the aviation, defense, space, medical, telecommunication, and electronic industries, which could negatively impact our costs and revenues.

Those listening to this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission including, but not limited to, filings on Form 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.

The moderator for today's call is Laurans A. Mendelson, Chairman and Chief Executive Officer of HEICO Corporation. Please go ahead, sir.

Christy, thank you very much.

And before reviewing the first quarter operating results in detail, I'd like to take a few moments to summarize the highlights of what we consider another record-setting quarter. Consolidated net sales and operating income represent all-time record quarterly highs for HEICO, driven principally by all-time record net sales and operating income within our Electronic Technologies Group and record first quarter net sales and operating income within our Flight Support Group.

Consolidated net income and operating income for the first quarter of '12 are up 12% and 16%, respectively, on a 22% increase in net sales over the first quarter of '11. The Flight Support Group set a first quarter net sales and operating income record, improving 15% and 25%, respectively, over the first quarter of '11. The increase in net sales reflects organic growth approximating 10% as well as additional net sales contributed by an acquisition in the first quarter of fiscal '11, while the increase in operating income is principally the result of increased sales volumes and improved operating margins.

Electronic Technologies set all-time quarterly net sales and operating income records in the first quarter of '12, improving 38% and 4%, respectively, over the first quarter of '11. The increase in net sales and operating income principally reflects additional net sales contributed by the acquisitions of 3D Plus in September 2011 and Switchcraft in November 2011 as well as organic growth approximating 7%.

Net income per diluted share increased 13% to $0.45 for the quarter -- first quarter, and that was up from $0.40 in the first quarter of '11. Net income per diluted share in the first quarter of '11 included a $0.02 per diluted share benefit from the retroactive extension of R&D income tax credit. Internally, we adjust the first quarter of '11 to $0.38 on a more normalized basis. So in the way we look at it from a management perspective, net income was really up a little bit over 18% for the first quarter of '12.

In November 2011, as you know, we acquired Switchcraft through the purchase of all of the stock of Switchcraft's parent company, and that was for the price of about $142 million. Switchcraft is a leading designer and manufacturer of high performance, high reliability, and harsh environment electronic connectors and other interconnect products.

And the acquisition is very consistent with our practice of acquiring outstanding niche designers, manufacturers, and marketers of critical components in aerospace and electronics with strong management teams and enables us to broaden our product offering technologies and customer base.

A little more color on that, Switchcraft is an old-line company with what we consider an outstanding management team, extremely experienced. We have the highest regard for that management team and, as a matter of fact, some people have asked us how it's tracking, how it's doing, and it's doing exactly what we thought it would do.

In December 2011, we completed a new $670 million revolving credit facility, giving us excellent flexibility to continue to aggressively pursue quality acquisition opportunities, albeit perhaps larger than we have looked at in the past. And we're grateful that HEICO's excellent performance and credit characteristics have enabled us to more than double the size of the prior $300 million facility.

In January 2012, we paid our 67th consecutive semi-annual cash dividend since 1979, and this was at a rate of $0.06 per share. As of January 31, the Company's net debt to shareholders' equity was a low 25.9% with net debt, which is total debt less cash and cash equivalents, of about $167.7 million, and that reflects the acquisition of 3D Plus and Switchcraft.

You'll note that we have no significant debt maturities until fiscal 2017 and a net debt to EBITDA leverage ratio of less than 1%. I'm sorry, not 1%, less than one time.

Moving on to net sales, consolidated net sales in the first quarter of '12 increased 22% to a record $212.7 million, up from $174.2 million in the first quarter of '11. Flight Support net sales increased 15% to a first quarter record of $138.9 million. That was up from $120.6 million in the first quarter of '11.

The increase in net sales for the first quarter of '12 reflects organic growth approximating 10% as well as additional net sales contributed by a full three months of operating results from an acquisition in the first quarter of '11. The organic growth principally reflects increased market penetration within certain of our industrial product lines. And these were primarily products used in heavy-duty and off-road vehicles and also within certain of our aerospace repair and overhaul services, and this compared favorably to 2011 first quarter.

After-market parts sales were also up in the first quarter of '12 over the first quarter '11, but at a slower pace. We attribute the slower growth percentage primarily to extraordinary growth in the first quarter of last year when organic growth approximated 24%, and that was despite November and December being typically Flight Support Group's weakest months and that was then followed by a typically strong January.

Last year most likely was impacted by some level of pent-up maintenance demand following cutbacks by the airlines in 2009 and '10. In addition, the slower sales growth in the first quarter of '12 reflects our reduced sales emphasis on certain lower margin PMA parts.

Electronic Technologies' net sales increased 38% to an all-time record of $74.5 million, up from $53.9 million in the first quarter of '11. And that increase in net sales in the first quarter of '12 reflects additional net sales of approximately $17 million, contributed by the previously mentioned acquisitions -- Switchcraft and 3D -- as well as organic growth of about 7%.

Let me just mention that we always talk about ETG growing at an organic of about mid single digits -- mid to upper single digits, so it was right on target. The organic growth in Electronic Technologies principally reflects continued strength in demand for certain of our medical and defense products.

Net sales for the first quarter of '12 by market were composed approximately 55% commercial aviation versus 60% in the full fiscal '11; 24% from defense in space, both in the first quarter of '12 and the full fiscal '11; and about 21% from other markets, which includes medical, communication, electronics, and this was the 16% in the full fiscal 2011.

Operating income, consolidated for the first quarter of '12, increased 16% to a record $37.6 million, up from $32.5 million in the first quarter of '11. Flight Support's operating income increased 25%, a very healthy 25%, to a first quarter record of $25.5 million. And that was up from $20.4 million in the first quarter of '11, and this principally reflects increased sales volumes as well as improved operating margin.

ETG operating income increased 4% to a record $16.2 million, up from $15.5 million in the first quarter of '11, and this represents operating income contributed by the recently acquired businesses.

The operating margins, consolidated for the first quarter of '12, was 17.7%, compared to 18.6% in the first quarter of '11. Flight Supporting operating margins were 18.4% in the first quarter of '12. That was up significantly from 16.9% in the first quarter of '11, and that reflects a favorable product mix and favorable impact on operating margins that higher sales has on the fixed portion of our operating expenses.

ETG operating margins were 21.8% in the first quarter of '12, compared to 28.8% in the first quarter of '11. That decrease in operating margin for the first quarter of '12 principally reflects the impact from lower operating margin realized by our French subsidiary, newly acquired 3D Plus, and a more favorable product mix than the first quarter of 2011.

The lower operating margin from 3D Plus is principally attributed to softer orders in certain of its products in the first quarter of '12, resulting primarily from the economic uncertainty throughout Europe and approximately $1.2 million associated with non-cash charges for amortization of intangible assets and inventory purchase accounting adjustment.

And just to add a little bit of color, I guess most of you understand this, but that is where certain inventories that are acquired, principally finished goods, under the account rules must be written up from their historical cost to fair value as of the acquisition date. And the increase in that value or cost is charged to cost of sales as the items are shipped, so that has the result of reducing the operating margin because that higher cost inventory is costed out in cost of sales.

Although margins were lower than were expected at 3D, there were no asset write-downs. Just a little bit of color on that, we purchased 3D because we felt it was an unusual opportunity to gain access to European and foreign markets. Often, it's difficult for US companies to access particularly European markets because they're very pro-European producers and European companies.

And this gave us a foothold in a very, what we believe is an expanding and very strong market -- world market -- Europe and Far East and so forth -- for the products that 3D makes. And if you want to know what they are, later on Victor can respond to that and give you more detail.

As we discussed before, variations in product mix and the timing of customer deliver requirements may cause operating income and operating margins of Electronic Technologies Group to vary from quarter to quarter. And this is due for 3D Plus as well, and I think this is a very good example. We do believe at this point based upon 3D management to see stronger performance, particularly in the second half of the year as orders have been picking up and are expected to pick up. So we think 3D was the right decision and the actual operations should prove that out.

Excluding 3D, Electronic Technologies' operating margin in the first quarter of '11 would have been 25%, approximately 25%, which is comparable to Electronic Technologies' full year operating margins, and they normally approximate 25% to 26%.

Diluted earnings per share increased 13% to $0.45 in the first quarter of '12, up from $0.40 in the first quarter of '11. As I mentioned earlier, the first quarter of '11 includes $0.02 benefit from retroactive extension of the R&D tax credit. I told you internally for operating purposes we looked at '11 as really $0.38, so the growth in our mind is about 18.4% on a diluted earnings per share basis.

Fiscal '11 diluted earnings per share has, of course, been respectively adjusted to reflect the 5-for-4 stock split that was affected in April 2011. Depreciation and amortization expense increased by $2.7 million to $7 million total in the first quarter of '12, up from $4.3 million the first quarter of '11. This reflects higher amortization and depreciation expense related to the acquisitions which I mentioned earlier.

Research and development expense increased 15% to $6.5 million in the first quarter of '12, up from $5.6 million in the first quarter of '11, and this is principally due to further enhance growth opportunities and market penetration. And we always believe that our commitment to invest in new product development has proven very effective over the years. It continues to be a significant part of our long-term growth strategy in both of our operating segments.

SG&A expenses were $40.6 million in the first quarter of '12 versus $31.6 million in the first quarter '11. The $9 million increase in SG&A principally reflects an increase of $7 million attributable to the newly acquired businesses.

SG&A spending as a percentage of net sales increased 19.1% in the first quarter of '12, from 18.1% in the first quarter of '11, and this principally reflects the impact of higher SG&A expenses as a percentage of net sales at the acquired businesses.

Interest expense still is pretty low. It increased to $0.6 million in the first quarter of '12, from $0.1 million in the first quarter of '11. And the increase was principally due to higher weighted average balance outstanding under the revolving credit facility, and that was associated with the previously mentioned acquisitions, of course.

Other income in both years was not significant. Our effective tax rate increased to 34.2% in the first quarter of '12, up from 30.4% in the first quarter of '11. And the increase in the rate was principally due to the income tax credit for qualified R&D for the last 10 months of fiscal 2010, and that was recognized in the first quarter of fiscal 2011 because of the retroactive extension of the tax credits to cover the period from January 2010 to December 31, 2011.

The increase in the first quarter of fiscal '12 was attributed to the expiration of the R&D tax credit as of December 31, 2011 and also our purchase of certain non-controlling interest at the end of the first quarter of fiscal 2011.

The net income attributable to non-controlling interest was $5.3 million in the first quarter of '12, compared to $5.4 million in the first quarter '11. And the decrease in the first quarter of '12 principally reflects the previously mentioned purchase of certain non-controlling interest by HEICO. That is, that we acquired a percentage of some of the non-controlling interest during fiscal '11, and that was partially offset by higher earnings in Flight Support in which a 20% non-controlling interest is held by Lufthansa.

Moving over to the balance sheet and cash flow, our financial position and forecasted cash flow remained extremely strong. Working capital ratio is strong at 3.5%. That's current assets divided by current liabilities as of January 31, 2012, and that's up from 2.6% at October 31, 2011.

DSOs of accounts receivable, 47 days in both January 31, '12 and October 31, '11, and we continue to closely monitor all receivable collection efforts to limit credit exposure. No one customer accounted for more than 10% of net sales. Top five customers represented approximately 15% of consolidated net sales in the first quarter of '12, compared to 18% in the first quarter of '11. We like that because we're diversifying and we think that's good for the overall financial health of our business.

The inventory turnover rate as of January 31, 2012 was about 126 days. That was up from 113 as of October 31, '11, and that reflects the impact of this previously discussed acquisitions on that computation and so forth. If you exclude the recent acquisitions, the turnover rate would be 121 versus the actual of 126.

Cash flow used in operating activities in the first quarter of '12 was $2.3 million, primarily driven by the timing of certain payments pertaining to fiscal 2011 year-end and fiscal 2012 payables. And we continue to expect fiscal 2012 cash flow provided by operating activities to remain strong and to be in the range of $120 million to $130 million. The fact that the first quarter was negative is really -- bears no impact. We expected that and that's nothing to be concerned about.

Capital expenditures in the first quarter of '12 were $3.8 million, and we budget CapEx for the full 2012 to be in the range of $20 million to $22 million.

Now, looking ahead, the outlook. Improved economic conditions and increased capacity in the airline industry resulted in higher demand for Flight Support's products and services and strong sales growth for each of our reporting periods during 2011. Based on overall economic uncertainty, the commercial airline industry expects continued year-over-year capacity growth, but perhaps at a slower rate than experienced during 2011.

In our Electronic Technologies markets, we general anticipate stable demand for products, for our products, but recognize that government deficits and spending reduction plans may moderate demand for certain of our defense products. Based on current market conditions, we continue to estimate fiscal 2012 growth in the area of 15% to 18% in net sales and 10% to 12% in net income over fiscal 2011 levels, with consolidated operating income approximating $155 million and depreciation/amortization about $30 million.

These estimates include the recent acquisitions of 3D and Switchcraft, but exclude additional acquisitions, if any. And consistent with our long-term growth goals, management continues to target net income growth of 20% for the full fiscal 2012 year, but it remains too early in the year for us to make that prediction.

We do continue to pursue a number of attractive acquisition opportunities. Some of the opportunities we put on hold because of pricing. We don't know if those opportunities will come back, if the sellers will lower the pricing, but there's a possibility. But maybe they won't, but certainly the pipeline is pretty good for the acquisitions over the year. Historically, we've made two to three acquisitions during the year; I think that's reasonable to the outlook at this time.

In closing, we will continue to focus on intermediate and long-term growth strategies with an emphasis on the development of new products, new services to meet the needs of our customers and strategic acquisition opportunities that complement our existing operations.

That's the extent of my prepared comments, and I would like Christy, our operator, to open the floor to questions. And, of course, Tom, Eric, Victor are all here to be responsive to your questions. So, Christy, let's open the floor.

Thank you. (Operator Instructions). And your first question comes from Tyler Hojo of Sidoti & Company.

Yes, hi. Good morning, everyone.

Good morning, Tyler.

Yes. So first question, I just wanted to go back to the growth rate in the Flight Support Group. I guess you mentioned in your prepared remarks that you were de-emphasizing certain lower margin products. Just kind of wondering what -- if you could maybe quantify that a little bit or just speak to that trend.

Eric is going to respond to that.

Hi, Tyler. As you know, the team members at HEICO and the leadership are incentivized on operating income, and that's really the performance that our leadership looks at and we think the metric that our shareholders want us to focus on.

So as a result, they really don't -- sales is just not something that is really important to them because it's somewhat irrelevant to the total earnings. So as a result, there were certain lower margin products which consumed a certain amount of time to develop support and just generally consume leadership and management time.

So we, in certain businesses, made certain decisions to de-emphasize certain lower margin areas and focus on higher margin areas. And I think that's why you've seen the margin -- one of the reasons why you've seen the margin pick-up in the Flight Support Group.

We can't get into the details for competitive purposes. And perhaps some of these lower margin areas will end up coming back in terms of demand, perhaps at price levels that are more attractive to our business unit, but they've made the decision at this point just to de-emphasize certain products.

Okay.

But that's all part of the natural running of the business, and I would not say it's really material to the trend or where the Company is going.

Were the lower margins more attributable to volume or price?

It could be both. It could be both, both the volume as well as the price. And sometimes, frankly, with customers you've got to push back a little bit. And when margins in certain areas need to be picked up, we have to take certain positions.

So we continue to be very customer-friendly and we want to obviously sell as much as we possibly can, but we've got just a certain amount of bandwidth. And we really want our sales and product support people to focus in areas that are most accretive to HEICO and its shareholders.

No, it totally makes sense. And just kind of a follow-up to that, just kind of wondering how you're looking at maybe enacting further price increases when you look at our PMA catalog as it sits today. What have you enacted and kind of just how are you thinking about that?

We don't publish a -- we don't announce, really, an average price increase. There are all sorts of ways to calculate it if you weight it by volumes, unit volume, which, of course, nobody knows but us, and it can be calculated just as a straight average of all the parts, the thousands of parts that we provide.

We continue to be extremely customer-friendly to those customers who want to provide long-term commitments to us. And that is a vast majority of our business. OEMs have taken -- our competitors have taken the opportunity to jack up prices significantly. And, as a matter of fact, there tends to be a tremendous amount of concern out there in the industry. I was just over in Singapore last week, and many people were commenting that on the newer platforms they sensed that the OEM prices are going to be even more egregious than they've been in the past.

So I think that there is opportunity for us. We get a little bit of pricing in our existing parts, but, of course, we basically get pricing and it's this successive generation of parts are more expensive -- significantly more expensive than the ones that they replaced. We sort of get a secular price increase with each new generation of product.

So we continue to look at that; and where we can get pricing, we certainly do.

Great. Thanks for all the color and I'll hop back in the queue.

You're welcome. Thank you.

Thank you. Your next question comes from Arnie Ursaner from CJS Securities.

Hi. To follow-up on Tyler's question, what's exactly involved when you de-emphasize a product? Do you discourage your sales force or do you --? How do you de-emphasize a product?

Arnie, this is Eric. We have a limited number of sales people. I'm guessing we've got roughly 100 sales people in this organization. And they only have a certain amount of time with customers to be able to focus on a certain number of products. And there are some products that are just, frankly, less profitable than others. Some of those products may be less important to our customers as well, and we just don't spend the time on them that we spend in other areas.

So don't get me wrong, we're not going out there saying to customers, "Please don't order these parts," but we may not be following-up; we may be raising the price somewhat; we may not care if the volume falls off; we may have our people focused in other areas. So when you sit down with a customer you can go over X number of items per time; maybe those items are not on the list.

But that's what we mean in terms of de-emphasizing the products.

Just to be clear, we are not discontinuing the sales of those products and we still continue to offer those products. Sometimes, we just need higher pricing to make them more attractive or higher volumes. But it's just in the natural flow of business.

You had very good margin this quarter in flight safety, and I assume part of it relates to the strategy. Should we, on a go-forward basis, assume you can maintain 50, 100 basis points higher margin in flight safety if this trend continues?

Arnie, this is Tom Irwin. As we went into the year, our comment was in terms of margins that we saw some opportunity for modest margin improvement. We continue to think that's the case for Flight Support Group. It will part depend on mix going forward. I think we do expect some strengthening. Whether they will be at that high a level throughout, it's kind of hard to tell going -- pre-determining by quarter, in particular. But I think we continue to expect modest improvement for the full year.

Tom, as long as I have you, long-term debt jumped to $190 million. Should we assume that Switchcraft was roughly $150 million and your availability currently is about $500 million?

Yes. Actually, the purchase price, as Larry mentioned earlier, for Switchcraft was $142 million. Prior to the close of last fiscal year, of course, we borrowed for 3D Plus, and so there was some outstanding there as well. And obviously with the cash flow from operations forecasted $120 million to $130 million, we'll pay that down throughout -- not totally pay it down over the year, but there will be a pro rata reduction the remainder of the year.

My final question is on 3D, where you mentioned the -- specifically highlighted softer orders for certain of its products. Do you believe it's timing or is there a fundamental change in those specific products? And also, remind us if 3D has an earn-out.

Arnie, this is Victor. And the answer is we don't think it's a fundamental shift in the products; we think it's timing. In fact, we've seen the orders improve substantially of late. And I think as that continues and those things get [shift and anything] to do with lead times and so forth, I think we would look for improvement in the sales line in the third quarter of our fiscal year. And there is no earn-out for that transaction.

Thank you very much.

You're welcome.

Arnie, this is Larry. Just one comment, picking up on your question about the debt. I think that we have plenty of debt capacity for any acquisition plan that we might have, and so the $190 million that we show on the balance sheet and there's $27 million in cash, so the net is $160 million, $170 million -- whatever the number is -- and with cash flow of give or take $120 million, $130 million, that's going to be way, way down. So we have more than enough debt capacity for anything we're evening thinking about.

Well, plus you have an accordion feature on the debt you have.

Exactly. Exactly.

And again, I'm not going to remind you of the math we've talked about if you are successful in these acquisitions. I assume -- it sounds like you're remaining quite price disciplined --.

Yes. I think that's been part of our success, that maybe in some cases we should have paid more, but we can't argue with success. The process has worked well and we look -- as you well know, you can overpay and then you can see markets drop.

I have said publicly that one of the acquisitions we were looking at was in the defense area. And it was a very good -- it still is a potentially very good acquisition, but what is the future of defense? So you can one price today and then wind up seeing the defense budget cut and seeing the sales and earnings of that acquisition fall, and that's going to impact the growth going forward.

So all these things we try to balance -- purchase price, growth, everything else -- and we would rather --. The money's not burning a hole in our pocket; we can grow very, very nicely and we can look elsewhere. And there's plenty of fish in the sea, so that's how we operate the business. And as you well know, we're very conservative in the way we spend bank lines and shareholders' money. I think -- I'm confident that the acquisition program will work out fine.

Larry, you sound like you own a few shares and maybe not driven by size and ego.

For sure.

Thank you. Your next question comes from Julia Yates of Credit Suisse.

Good morning.

Good morning, Julie.

Victor, this one's for you. In ETG, can you help us understand the weakness in the margins a little bit more in terms of how they should trend the rest of the year? If sales on 3D Plus aren't going to come back until maybe the third quarter, could you see this weakness persist into next quarter?

I think it vacillates, it moves up and down. It sort of oscillates as it has historically. So it's not unusual for us to see lower margins in the business. I think it will be in the second quarter -- it's just too early to tell where we're going to be in the second quarter alone. But I think for the full year, we're still thinking that we should get to that sort of mid 20s margin that we've talked about historically.

Okay.

And as I said earlier in response to Arnie Ursaner's question, we're seeing order improvement -- significant order improvement in one place where it particularly dragged us down.

Okay. And then, did Switchcraft have any impact on margins in the quarter?

No, I think it was pretty much --. Switchcraft, number one, did perform as expected. Number two, even with the purchase accounting adjustments, the amortization of inventory adjustments, the types of things that we expected, it didn't have a significant change on the reported margins, plus or minus. So it's in line and, again, that was a higher margin business that met our norm, if you will.

Okay.

We think 3D on the long-term basis will hit our norm as well, but the near-term impact has been a shortfall.

Okay, great. And then, Tom, just on SG&A at 19% of sales. How do we think about that and the rest of the year? And I think you mentioned $7 million of the increase was from acquisitions. Does that continue in the year or is that more one-time in the quarter?

That would -- I think the answer is those businesses have a slightly higher mix of SG&A versus margin. Again, we focus on the operating income margin line, and our expectations are they will hit our targeted operating margin.

But they do, being the types of businesses, have a little bit more of a sales effort. And as an example in smaller businesses, often the two or three key executives are SG&A classified but they're also number one salesman and number one technical guy, and so that tends on the smaller electronic businesses to weight the SG&A above sort of industry averages of bigger companies. And similarly, the direct manufacturing costs or gross margins tend to be higher than overall larger industry costs.

Okay. So on a full year basis for FY12, as a percentage of total sales, would we expect it to increase over the 17.8% in FY11?

Yes, I would say so. I would say it'd be more norm -- I think a run rate is a bit more typical than what it may be last year before we bought these businesses.

Okay. Thank you.

Both businesses, in effect, we're saying have higher SG&A percentages than 17.8%, so they would drive them up.

Okay. But is it as high as the 19% or somewhere in-between there?

It would be in the higher range.

Okay. Thank you.

Thank you. Your next question comes from Ken Herbert of Wedbush.

Hi. Good morning, everybody.

Good morning, Ken.

Just wanted to first, one final question from my end on 3D Plus. When you think about this business, it sounds like there's some timing on the top-line which should benefit later in the year. How much of the recovery in the margin of this business through the rest of this year is from potential changes to the cost structure? And is that something that you've got in the plans or much flexibility on?

Ken, this is Victor. The answer is there is some improvement in the cost structure that's going on there now, but the improvement in the bottom line will come mostly from the top-line growth.

Okay.

From resumption to kind of getting back to where they should be.

And if Switchcraft performed as planned, is it safe to say that the top-line shortfall from 3D Plus in the quarter was -- well, it seems like it was much more significant than you were expecting maybe one or two quarters ago when you announced the acquisition. Is that a fair statement?

Yes, that's correct.

All right --.

And I --.

Go ahead, I'm sorry.

No, I think that summarizes it well.

Okay. And then, just to jump over within Flight Support, you mentioned -- or you highlighted specifically better growth on the repair and overhaul side of the business. Eric, can you provide any more details on that in terms of specific parts or specific areas that you're seeing?

We tend to -- I tend to think of that as -- and I think over the last few quarters you've seen better growth on the parts side than on the repair side, and it seems like this quarter was the inverse. Can you provide any more detail, specifically on the repair side and what you're seeing there? And maybe, through the rest of 2012, do we see growth on that repair side maybe outstripping the parts growth?

Ken, yes, this is Eric. As you know, we have a hard time getting into details of the specific types of products for customers because our competitors are on the call. But as you know, we do all sorts of component overhaul; we're one of the largest non-OEM, non-airline-affiliated component overhaul businesses in the United States.

We do fuel, hydraulic, pneumatic, electromechanical, avionics, wheels and brakes, structures -- all sorts of components basically throughout the aircraft. And we're seeing a lot of interest in those products. As you know, our business is -- nothing normally goes up in a straight line. Things bounce around a little bit. And we'll capture a bunch of market share in a particular area and then we'll consolidate it and we'll go flat for a little bit of time and then it jumps back up as we lay the groundwork for more business and as we add more capabilities.

So I think what you're seeing is just really the natural cycling of the business. I wouldn't draw any conclusions that we're focusing on one part of the business over the other. It's just sometimes there's particular strengths in one area and sometimes we don't exactly know why until many quarters after the fact and we finally figure it out.

Maybe a customer buzzed us with a particular new type of product in the beginning that they've got stocked up waiting for us to go into a certain area and it levels out at a different rate. All sorts of things invariably happen.

But we are seeing significant opportunity in the component overhaul side using our parts as well as using OEM parts. I wouldn't say that it's in any one particular area; it's just really strength throughout the entire area. And over on the parts side, we continue to develop all of the same type of parts that we've developed now for the last five or 10 years, and we're just continuing to do that as well.

Okay, that's helpful, Eric. Just one final question. When you look at the overhaul and the repair business then, it looked like it was a really -- very strong for that side of the business. Is there any reason for you to think that that strength won't continue through the rest of this fiscal year?

No, I wouldn't say that I wouldn't expect the strength to continue. The businesses, as I said, move around and we see strengths in different areas at different times. I wouldn't want to call it a trend or anything like that. Again, we typically don't understand it until well after the fact.

But I expect to see continued growth, frankly, in all of the products and services that we offer within FSG. I wouldn't say that the growth is going to come from one particular area or another; I think it's going to be pretty broad-based.

Okay. Thank you very much. And good quarter. Thank you.

Thank you, Ken.

Thank you.

Thank you. Your next question comes from Steve Levenson of Stifel Nicolaus.

Thanks. Good morning, everybody.

Good morning, Steve.

I know you don't like to talk specifically about parts, but I'm sorry, I've got to ask this one. It looks like there's going to be some pretty good growth in engine maintenance events, particularly this year and continued strength into next year. And it looks like it's skewed more to narrow bodies; and even within narrow bodies, more towards A320 family and the V2500 engine.

Are you all satisfied with your content on V2500? Would you like to have more in both parts and services? And do you think that will be helpful this year?

Yes. We continue to develop products in all platforms. And I would say that if there is a resurgence in narrow body engine demand, that will definitely benefit us. So we continue to develop new products. We've already got a large portfolio in narrow body engine parts and so I would expect to see continued growth in that area if that, in fact, comes to fruition.

Great. Thanks a lot, and thanks for all the detail in the call.

Thank you.

Thank you.

Thank you. Your next question comes from JB Groh of DA Davidson.

Hey. Good morning, guys. Thanks for taking my call.

Good morning.

Larry gave some details on ETG, sort of business mix. But, Victor, I was wondering if you could sort of give us kind of a pro forma look with Switchcraft and 3D Plus, what that business mix is like when you include those two on a trailing basis or something.

You mean like end markets?

Yes.

Like [in the end markets]. Okay. I think what the business looks like with 3D Plus and with Switchcraft is that we probably are somewhere in the neighborhood -- in terms of defense, it's probably somewhere in the neighborhood of about 30% or so, straight defense, on kind of a go-forward basis, somewhere in that range. And space is probably something more like -- going forward, probably somewhere in the neighborhood of 15%.

And then, in the other markets it's probably somewhere in the neighborhood of 40%, 45%, somewhere in that range of the business. And then, of course, commercial aviation is probably somewhere in the upper single digits, somewhere around there. And within the other markets, medical would be a significant portion, maybe -- I don't know, somewhere, a third to a half, something like that, of the remainder.

Okay. So you've lessened the dependence on space and defense with the deal?

In the case of Switchcraft, yes.

(inaudible - multiple speakers).

In the case of 3D Plus, that's almost all space.

Right, okay. Okay. Okay, that makes sense. Okay. And then one for Eric. What's your sense of sort of customer inventory levels? It seemed like some other guys that are sort of after-market levered had these sort of blowout quarters in terms of numbers and capacity didn't change that much. So I was just kind of curious as to what your feel is for inventory levels. What are your sales guys saying on that front?

Actually, there was, I think, a focus by number of customers in November and December to bring down their inventory level. I think that they continue to bring it down as they report their year-end numbers. But we see things running at a pretty stabilized rate right now. We have not seen -- if you [know] the traditional restocking where customers want to keep more months on the shelf. I think customer inventories remain very, very lean.

And if there is a pick-up in demand in any of these areas, I would expect that we would be selling parts very quickly for it because the airlines really just don't have -- they don't have much inventory on the shelves right now.

And I think in the past you've said you get these surges in fuel prices, the phone starts to ring a little bit more because they're looking for ways to save. How do you kind of balance that with the probability that capacity gets reigned in a little bit? What are your thoughts there relative to kind of last cycles where we had big moves in fuel?

Yes. There's no question that whenever fuel prices go up the airlines get more serious about cutting their costs and they become much less complacent and much more aggressive. So I think that that is a good medium and long-term driver for our business.

As far as the short-term, if they remove any capacity, then obviously that would hurt. However, if you look at it, the airlines have been able to pass through a significant amount of the fuel cost increases over the last six months or so.

So we see continued strength by the customers. I think we're fortunate in that some of the fleets that are being impacted don't impact us as much. But we anticipate continued strength, really, in the markets that we serve. And as airlines come under pressure, I think it provides great opportunity for us.

Great. And then just a quickie for Tom. Tom, what's the -- you mentioned this, but what's the tax rate embedded in your guidance?

For the full year, it's basically based on the first quarter, running around 34%. That does assume that there's no extension of the now expired R&D tax credit. There's some discussion, but at this point we have not factored that in there. And again, that would be an upside if it is extended or certainly if it's extended before the end of the year.

But again, at this point it's looking like the current, first quarter rate continued throughout the year with no additional R&D extension.

Great. Thanks for your help. See you guys in a few weeks.

Thank you.

Thank you.

Thank you. (Operator Instructions). And your next question comes from Eric Hugel of Stephens.

Hey. Good morning, guys.

Good morning, Eric.

Can you maybe give a little more clarity? On the PMA products that you'd talked about, you were de-emphasizing, is there maybe some common theme as to why you can't get the pricing that you want? Is there competition, alternatives? Are the OEMs sort of lowering price? Can you sort of talk about -- are they certain types of products, maybe older engines or non-engine parts?

I think it really is due to all of the above. I would not say, though, that it is due to an increased amount of competition in those areas. I think that's not the case. It would really just be -- we have a natural distribution of profitability by parts and sometimes depends on the amount of volume that we've got on a particular part.

So sometimes we've got increase in our market share on some things for it to be a competitive or maybe it's an older product that -- where the price was set a long time ago. And as a result, the OEM price is not as high as it is on a similar part on a newer platform. So it really covers a whole bunch of different products.

But I would not say it's due to increased competition for those parts. It really is -- we offer tremendous value on what we provide, and sometimes the value is, frankly, just too good. And we decide that if the value is too good in some areas, then we've got to focus on more profitable areas. So we just stop talking about it as much and we stop going after it and we're not so aggressive.

Sometimes you have to stop providing a part for a certain period of time until the customer is sort of willing to accept that the current price level has increased, and then they come back at a significantly higher price. So I would just say it's just part of the general flow of the business. This is no change and we've been doing this for 22 years. And I'd say that this has happened for the whole time that this leadership team has been at the Company.

Would you -- are there any sort of differences here that you're seeing in terms of engine versus non-engine parts? Are there any differences in terms of your ability to get the pricing that you want, or is that just not an issue?

No. I would say that's not an issue. That's really not an issue for us.

Okay. In terms of 3D Plus, can you talk about -- is it -- basically, was it across their whole product base that you saw sort of the drop-off in demand or were there really certain products that were more impacted and why?

Well, it was probably more on their main product line. They have a few product lines there, and I think it was more in particular markets -- in market segments, particular customers who were expected to place orders at the time and we were told that they were pushed out.

Okay. And I guess lastly, with regards to the FSG business, again, you talked about sort of most of the growth was related to the industrial products -- I guess that 10% organic growth in the FSG business. Can you give us sort of a ballpark figure as to sort of what kind of growth you saw on a year-over-year basis organically for the aerospace after-market business? Would sort of like a mid single digit, 5% kind of number be a reasonable ballpark?

You're speaking about all commercial aviation?

In the FSG segment, because you said that a lot of the growth in that was driven by the industrial business.

It's pretty -- overall, the aviation -- the commercial aviation after-market would be pretty close to the total 10% organic growth. Partly because you remember the industrial product, which is, again -- was growth above 10%, it's a small product line.

Right. Okay. SO it was around -- maybe a point or two below the 10%, but not too far different?

Exactly, yes.

Okay, great. Thanks a lot, guys. Good quarter.

Thank you.

Thank you. Your next question comes from Michael Ciarmoli of KeyBanc Capital Markets.

Hey. Good morning, guys. Thanks for taking my questions.

Good morning, Mike.

How are you? Just a couple of housekeeping questions. I may have missed this. Did you guys give -- within the Flight Support Group, did you give the mix between product and services for the quarter? Would you be willing to?

I would say -- I'm not sure we did, but it's probably running pretty close to what it's normally running in terms of, say, 65/35, something like that.

Okay.

I don't think it would be too far off that.

Okay. And then, just a point of clarity. On the ETG margin, you talked about kind of excluding 3D Plus you'd be at a 25% margin. Was that also excluding the amortization or excluding that additional charge for amortization of $1.2 million, puts you back up at a higher level over the 25%?

The answer is the 25% computation basically takes reported historic and just excludes all of the 3D. So it would be the sales, the cost of sales, the SG&A, which would include the amortization and the purchase accounting adjustments.

Okay.

So it's totally excluding 3D, sort of a normalized -- or if 3D were to hit the rest, then it would be in the 25% range.

Okay, perfect. And then, within ETG, are you guys seeing any pricing pressure from some of your defense customers given kind of what's been happening with the budget, with the cuts? Is that starting -- are you starting to get pushback on pricing for just better terms from some of your customers?

I don't think it's any different than it's been over the past several years, five years or more. So we're not seeing anything more pronounced at this point.

Okay. And then last one from me. Just on Switchcraft, can you give us -- you talked about, obviously, the order flow with 3D Plus. Any kind of order patterns or trends that you're seeing in Europe from some of the Switchcraft product lines?

Nothing that's notable on the Switchcraft lines that we're seeing out of Europe, I think. That's not a huge part of their business. They're more North American and some Asian, but they do business in Europe, but nothing that jumps out.

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

Thank you.

Thank you. At this time, there are no further questions. Are there any closing remarks?

The only closing remark is we thank everybody on the call for their interest in HEICO. We are available if you have additional questions. Tom, Eric, Victor, and I are available; give us a call. And we will -- otherwise, if we don't hear from you we'll either see you at an [aero] conference over the next couple of months or we'll be on the second quarter call sometime near the end of May. So we thank you and that's the end of the first quarter call. Thank you.

Thank you. This does conclude today's conference call. You may now disconnect.