HEICO Corp (HEI) 2012 Q3 法說會逐字稿

Welcome to the fiscal 2012 third quarter 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)

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 cost 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 cause our sales, HEICO's ability to introduce new products and product pricing levels which could reduce our sales or sales growth, HEICO's ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest 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 cost 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 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. I would now like to turn the call over to Laurans Mendelson to begin.

Thank you very much and good morning to everyone on the call. We thank you for joining us and of course, we welcome you to this HEICO third quarter fiscal 2012 earnings announcement teleconference. I am Larry Mendelson, CEO of HEICO Corporation. I'm pleased to be 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, Tom Irwin, HEICO's Senior Executive Vice President and now, for the first time to introduce you to Carlos Macau, our new Executive Vice President and CFO.

Before reviewing our third quarter operating results in detail, I would like to take a few moments to summarize the highlights of another record-setting quarter for HEICO. Consolidated third quarter net sales, operating income, and net income represent all-time record quarterly results for HEICO and this was driven principally by record net sales and operating income within ETG and the continued strong net sales and operating income within FSG. Our consolidated year-to-date net sales, operating income, and net income also represent all-time record results for HEICO and this was principally driven by record net sales and operating income in both segments. Consolidated third quarter net income and operating income are up 13% and 19%, respectively on a 15% increase in net sales over the third quarter of last year. Consolidated net income and operating income for the first nine months of 2012 are up 13% and 17%, respectively on an 18% increase in net sales over the first nine months of 2011.

ETG set a quarterly net sales record in the third quarter of 2012, improving by 51% over the third quarter of '11. The increase in net sales reflects organic growth of approximately 5% and additional net sales contributed by four acquisitions since the third quarter of 2011. Consolidated net income per diluted share increased 13% to $0.43 for the third quarter of 2012, up from 38% in the third quarter of '11 and this was a result of continued strong performance from both of our operating segments. We do mention that in the current quarter, there was an additional $0.02 included in the $0.43 of benefit from R&D tax credits. A year ago, there was a $0.04 R&D tax credit and for you mathematicians out there and analysts, some who have called me on this issue and asked me the question, by deducting -- of course, it's non-GAAP, but by deducting the R&D tax credit and coming to a 41% and 34% earnings, our income actually would have increased over 20%, almost 21%. The point is, you can play around with numbers and we're not recommending that you use the non-GAAP results. However, we do want to point out the strength of the business, the strength of the underlying operating business.

In July, we paid our 68th consecutive semiannual cash dividend at a rate of $0.06 per share and that represented a 25% increase over the prior split adjusted semiannual per share amount. Our cash flow remains strong in the third quarter of 2012, with cash flow provided by operating activities about $33 million. For the first nine months of 2012, cash flow provided by operating activities totaled $78.3 million, compared to $85 million for the first nine months of '11. As a result of this strong cash flow, our net debt to shareholders equity was a very low 20.1% at July 31, 2012, with net debt, and we define that as total debt less cash and cash equivalent, net debt of $139 million, principally reflecting an amount significantly less than the cost of the three acquisitions completed during the first nine months of fiscal '12. This reflects, of course, the Company's very strong cash flow. We have no significant debt maturities until fiscal 2017 and we maintain significant borrowing capacity under our $670 million revolving line of credit and we can use this for additional acquisition opportunities and other corporate purposes.

In August 2012, we acquired 84% of the assets and assumed certain liabilities of CSI Aerospace, which is a leading repair and overhaul provider of specialized components for airline, military, and other aerospace-related organizations. We believe that CSI's proprietary repair processes offer aircraft operators niche repairs, which provide a unique value. This is consistent with HEICO's strategy of offering our customers advanced and cost saving aircraft maintenance alternatives. We believe this acquisition will be accretive to earnings within the first 12 months, subsequent to purchase. As previously announced, HEICO is especially proud of the accomplishments of two of its Electronic Technologies subsidiaries, Sierra Microwave Technology and 3D plus, who designed, manufactured, and supplied critical electronic hardware on NASA's Curiosity Mars rover mission, which has successfully landed the Curiosity rover on the planet Mars this month.

Now drilling down into the individual items, in net sales, our consolidated net sales for the third quarter of '12 increased 15% to a record $226 million and this was up from $197.3 million in the third quarter of '11. For the first nine months of '12, consolidated net sales increased 18% to a record $654.9 million, up from $556 million in the first nine months of '11. Flight Support's net sales were $140.8 million in the third quarter of '12 compared to $140.7 million in the third quarter of '11. This very slight increase in Flight Support net sales reflected a $1.2 million increase in our specialty product lines; primarily attributed to increased demand for certain of our aerospace and industrial products, as well as $1.1 million increase within our aftermarket replacement parts product lines; principally from increased market penetration from both new and existing product offerings, partially offset by a slowing of aftermarket growth. The increases to our net sales were partially offset by a $2.3 million decrease in net sales within repair and overhaul; principally reflecting a general slowing of airline capacity growth.

Flight Support's net sales increased 6% to a record $420.7 million in the first nine months of 2012, and this was up $395.2 million for the first nine months of '11. This reflects organic growth of about 5%, as well as additional net sales contributed by a full nine months of operating results from an acquisition which we made in the first quarter of '11. The organic growth in Flight Support for the first nine months of '12 principally reflects increased market penetration from both new and existing product offerings within certain of our industrial product lines, as well as aftermarket replacement parts product lines. ETG's third quarter net sales increased 51% to a record $86.5 million. That was up from $57.2 million in the third quarter of '11. Net sales of ETG increased to a record $237.2 million in the first nine months of '12 and that was up 46% from the $162.5 million in the first nine months of '11.

The increase in net sales for the third quarter and the first nine months of '12 is principally attributed to additional net sales of approximately $26 million and $66 million, respectively; contributed from acquisitions since the last quarter of fiscal '11. Additionally, the increase in net sales for the third quarter and first nine months of 2012 reflects organic growth of about 5% and 6%, respectively; principally as a result of continued strength in demand for certain of our commercial, aviation, defense, electronic, and medical products. Our net sales by market for the first nine months of 2012 were composed approximately 54% commercial aviation, 25% defense and space, 21% from other markets, which includes industrial, medical, electronics, and telecommunications.

Moving now to operating income, consolidated operating income in the third quarter of '12 increased 19% to a record $42.5 million, up from $35.7 million in the third quarter of '11. It increased 17% to a record $117.7 million in the first nine months of 2012, up from $101 million in the first nine months of '11. Flight Support's operating income increased 7% to $26.4 million in the third quarter of '12, up from $24.6 million in the third quarter of '11. It increased 15% to a record $78.5 million in the first nine months of '12, up from $68.4 million in the first nine months of '11. That increase in operating income in the third quarter and first nine months of 2012 principally reflects improved operating margins. ETG operating income increased 36% to a record $21 million in the third quarter of '12, up from $15.4 million in the third quarter of '11 and increased 18% to a record $52.5 million in the first nine months of '12, up from $44.6 million in the first nine months of '11. The increase in operating income for the third quarter and the first nine months of 2012 is principally attributed to the operating income contributed by the acquired businesses and the organic sales growth.

Corporate expense as a percentage of net sales in the third quarter and first nine months of 2012 were 2.2% and 2%, respectively; and this is comparable to the 2.1% for both the third quarter and the first nine months of 2011.

Operating margins - consolidated improved to 18.8% in the third quarter of '12, up from 18.1% in the third quarter of '11, and in the first nine months of 2012, our consolidated operating margins was 18% compared to 18.2% in the first nine months of '11. Flight Support's operating margins improved to 18.7% for both the third quarter and the first nine months of '12. This was up from 17.4% in the third quarter in '11 and 17.3% in the first nine months of '11. Those improved operating margins principally reflect sales of higher margin products within our specialty products, as well as our aftermarket replacement product lines.

ETG operating margins were 24.2% in the third quarter of '12 compared to 26.9% third quarter of '11 and they were 22.1% in the first nine months of '12 compared to 27.4% in the first nine of 2011. The decreases in operating margin in the third quarter and first nine months of '12 as compared to the same periods in '11 principally reflect a dilutive impact of approximately 3% and 4% respectively from lower margins, operating margins realized by 3D Plus and Switchcraft. As discussed last quarter, the lower operating margin realized by 3D Plus in the first six months of fiscal '12 reflected lower demand for certain of its products during the last six months of fiscal '11. By demand, we mean the order flow. As orders at 3D Plus return to expected levels in early fiscal '12, product deliveries and sales began to normalize in our third quarter of fiscal '12, which helped to bring the operating margin of ETG to a more normal level. If you all recall, we discussed this issue at some length in the last conference call and we had a very high level of certainty that those orders would be shipped. In fact, what we told you has come to pass.

Excluding 3D Plus and Switchcraft, the ETG operating margins in the third quarter and first nine months of 2012 would have been approximately 27% and 26%, respectively, which is comparable to the ETG's full year operating margins, which normally approximate about 25%. As we previously have reported, variations in product mix and timing of customer delivery requirements caused the operating margins of ETG to vary from quarter-to-quarter.

Now, diluted earnings per share increased 13% to $0.43 in the third quarter of '12. That was up from $0.38 in the third quarter of '11. They also increased 13% to $1.15 in the first nine months of '12, up from $1.02 in the first nine of '11. Net income per diluted share for the third quarter of '12 includes a $0.02 tax benefit from lower income tax expense attributable to higher R&D tax credits on fiscal 2011 tax returns, which were filed during the current quarter. Net income per diluted share for the third quarter of '11 includes a $0.04 tax benefit from lower income tax expense attributable to lower state income tax and higher R&D tax credits on tax returns filed during the third quarter of fiscal '11. I've already commented on adjustments that people might want to make on their own and that will impact the earnings per share growth if you exclude the R&D tax credit in both periods. All fiscal '11 earnings per share have been retrospectively adjusted for our 5/4 stock split, which was distributed in April 2012.

Depreciation and amortization expense increased by $3.2 million and $8.7 million in the third quarter and first nine months of '12. This was up from $4.5 million and $13.4 million in the third quarter and first nine months of '11. The increase in both periods principally reflect higher amortization and depreciation expenses related to the previously discussed acquisitions.

R&D expense increased 15% to $7.5 million in the third quarter of '12, up from $6.5 million in the third quarter of '11 and increased 23% to $22.4 million in the first nine months of '12, up from $18.2 million in the first nine of '11. Significant ongoing new product development efforts are continuing at both Flight Support and ETG as we invest over 3% of each sales dollar in R&D activities. We do believe that our commitment to invest in new product development has proven very effective over the years and it continues to be a significant part of our long-term growth strategy in both of our operating segments.

SG&A expenses increased 23% to $41.8 million in the third quarter of '12, up from $34.1 million in the third quarter of '11 and increased 21% to $120 million in the first nine months of '12, up from $99.1 million in the first nine of '11. The increase in SG&A for the third quarter and first nine months of '12 principally reflects an increase of approximately $6 million and $17 million, respectively; attributable to newly acquired businesses. SG&A expense as a percent of net sales increased to 18.5% for the third quarter of '12 compared to 17.3% in the third quarter '11. This principally reflects an increase in amortization expense of intangible assets from acquired businesses and certain selling expenses within ETG. SG&A expense as a percentage of net sales increased 18.3% in the first nine months of '12, compared to 17.8% in the first nine months of '11. Again, principally reflecting the previously mentioned increase in amortization expense of intangible assets from acquired businesses.

Interest expense increased $0.5 million and $1.7 million in the third quarter and first nine months of fiscal '12. The increase principally due to higher weighted average balances outstanding under our revolving credit facility in the third quarter and the first nine months and that was all associated with our recent acquisitions. Other income and expense was really not significant in either period.

Our effective tax rate was 31.4% and 33.3% in the third quarter and nine months of '12, compared to 26% and 29.7% in the third quarter and first nine of fiscal '11. The effective tax rate increase in the third quarter and first nine months of fiscal '12 is primarily attributed to the effective tax rate for fiscal '11 reflecting a benefit from state income apportionment updates, as well as the retroactive extension of Section 41 of the Internal Revenue Code. That's called credit for increasing research activities and that covered the two year period ended December 31, 2011, which resulted in R&D tax credits recognized in fiscal '11 based on 22 months of R&D activities compared to just two months in fiscal '12.

Additionally, the effective tax rate increase in the third quarter and first nine months of '12 is attributed to higher effective state income tax rate resulting from a fiscal 2012 acquisition, as well as changes in certain state tax laws impacting state apportionment factors and our purchase of certain non-controlling interest during fiscal '11 and '12. We expect the effective tax rate to return to a more normal rate of approximately 34.5% in the fourth quarter of fiscal '12 and to me, it does sound like we are, HEICO, is paying its, quote, fair share. I hope you get that all down to the White House and tell Mr. Obama that we are paying our fair share.

Net income attributable to non-controlling interest -- the net income attributable to non-controlling interest totaled $5.5 million in the third quarter of '12 compared to $6 million in the third quarter of '11 and $17 million in the first nine months of '12 compared to $16.7 million in the first nine months of '11. The decrease in both periods principally reflects the previously mentioned purchase of certain non-controlling interests by HEICO during fiscal '11 and '12 and this resulted in lower allocations of net income to non-controlling interest.

Moving now to the balance sheet and cash flow -- I previously stated that our financial position and forecasted cash flow remains extremely strong. Cash flow remains very strong in the third quarter of '12, with cash flow provided by operating activities of $33 million. In the first nine months of '12, cash flow by operating activities was at $78.3 million compared to $85 million in the first nine months of '11. Our working capital ratio, of course, current assets divided by current liabilities was a strong 3.1 times as of July 31 and that was up from 2.6 on October 31, 2011. DSOs of receivables was 46 days in July 31, comparable to the 47 as of October 31, '11. Of course, we continue to closely monitor all receivable collection efforts in order to limit our credit exposure. I can tell you that the guys that do this job do an incredible job because our loss from bad debts is very, very low.

No one customer accounted for more than 10% of net sales. Our top five represented about 16% of consolidated net sales in the third quarter of '12. The inventory turnover rate as of July 31 was 125 days, up somewhat from the 113 as of October 31, '11. That reflected higher inventory levels for certain product lines necessary to meet customer demands. CapEx first nine months were $12.4 million, CapEx full year are expected to be $18 million to $20 million.

Now the outlook -- in our Flight Support Group markets, forecast a potential decelerating capacity growth within the commercial aviation market, as well as continued global economic uncertainty may moderate our net sales growth for the remainder of fiscal '12. In our Electronic Technologies Group market, we generally anticipate stable demand for most of our products, but we do acknowledge that government deficits and spending reduction plans may moderate demand for certain of our defense products. Based upon current market conditions, we estimate full-year fiscal 2012 net sales to approximate $890 million, operating income to approximate $160 million, and year-over-year growth in net income to be 13% to 14%, which represents the high end of our previous net income growth estimate range. We're pleased to confirm our growth estimates, despite near-term economic uncertainties. Additionally, full year fiscal 2012 depreciation and amortization expense expected to be about $30 million. These estimates include the fiscal 2012 acquisitions of Switchcraft, Ramona, Moritz, CSI, but exclude the impact of additional acquisitions, if any.

In closing, I want to say that this management team 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. I thank you. That is the extent of my prepared remarks and I would like to open the floor for questions. So, if the Operator will bring on the questions.

(Operator Instructions)

Tyler Hojo, Sidoti & Company.

First question, if I look at your full year guidance, it looks like you're anticipating a pretty large sequential increase within the Flight Support Group in terms of revenues. I'm just wondering, if you look at it, we're coming off of a quarter where basically this is the first quarter where sales have declined sequentially in a pretty long time. I'm just wondering what gives you confidence that we're going to see that snapback in Q4?

Tyler, good morning and Tom will answer that.

Tyler, again, this is Tom Irwin. In reference to our full year estimates, inherent in that is, obviously you can do the math, somewhere about 11% to 12% sales growth that we're assuming is going to come from acquisitions over the last 12 months. Earnings inherent is about an 18% growth. As it relates to organic growth in our estimates, and we don't break our revenue growth or revenue by segment, but on a consolidated basis, inherent in our estimates is a flattish organic growth. We hope to do better, but I think given the uncertainty that's what's in the numbers. The answer is most of it will be from the acquired businesses.

Got it. Just from an air traffic perspective, I think before you guys were looking for something like 3% to 5% growth in air traffic. What are we looking for now embedded in the guidance?

Again, this is Tom Irwin. I would say probably near those same ranges, subject to the possible uncertainty of whether -- there's some speculation that capacity growth will slow further in the second half. That may bring it to the 3%, but I would think probably somewhere roughly into that range, when the dust settles, what the full-year international capacity numbers will be or global international.

Okay. Great. I was curious if you could maybe speak a little bit more about the pace of new product introductions? I think going into the year, you guys thought you'd be about flat in terms of new PMAs and DERs. Are we on track to achieve that?

Todd, this is Eric. Yes, we're on track to achieve our projections and the rate of PMA and DER development is consistent with prior years. I can tell you, although we do not speak about specific products nor customers nor OEMs due to the fact that we don't want to give a heads up to our friendly competitors on the call as to what we're doing, we do have some very interesting products in the pipeline, products which most people would not expect us to develop. There is a broadening of our product line into some very exciting areas. But in terms of numbers, I would say it's consistent with the past.

Got it. Great. Thanks a lot, guys.

Julie Yates, Credit Suisse.

Just going back to Tyler's question on the top line outlook, I think expectations have moderated from last quarter by about $16 million. Specifically, what are the drivers of the lower outlook and then what are you assuming that CSI contributes in the full year number of $890 million?

Again, just broadly, on a consolidated basis, relative to the latter question in terms of CSI, no financial details were disclosed, basically based on it's immateriality. We have commented that CSI is a typical HEICO-type bolt-on acquisition, call it a single or double. We typically say it's revenue of a typical acquisition is $10 million to $70 million in EBIT purchase multiples somewhere $5million to $7million. It, in fact, would be on the low end of that range. The bottom line is, CSI won't contribute a significant amount in the fourth quarter. It was just acquired and again, a small transaction. Again, I think in terms of overall consolidated results, we're contemplating roughly flattish organic growth on a consolidated basis. I'll let Eric and Victor speak to the individual markets.

This is Eric. As you know, Europe has really been struggling and along with the rest of the industry, we've seen that. Definitely weakness out of Europe, I would say pretty much strength in Asia, sort of flattish in the Americas, maybe up a little bit in the Americas. But Europe has really been the primary drag. When you compare it to our third quarter fiscal 2011 organic growth, FSG grew 23% in that quarter. While we were basically flat this quarter, and of course, our management and leadership team is compensated based on operating income growth, which was about 7.5%, I was quite pleased that, given the weakness in Europe, we were able to maintain our sales off of a very strong number last year in the face of really what's going on over there in terms of significant cutbacks.

Okay. You guys clearly had great margin performance in the quarter in both of the segments, but it seems like maybe the full year EPS guidance implies that might moderate some in the fourth quarter. Is that just conservatism? How do we think about the mix, the favorable mix, in this quarter and the sustainability of the margin improvement?

This is Tom Irwin again. Again, inherent in our overall fourth quarter guidance is -- in part, will fluctuate, depends on the mix. Our Repair Services business was down somewhat in the third quarter and again, as you may recall, there was Repair services is somewhat lower margin than our aftermarket and Specialty Products parts margins, if you will. It could depend on the mix of service versus parts, but I think overall, we look for continued operating margins somewhere in that 18% range or obviously slightly better; not going to 19% or anything like that, but somewhere in that 18% range.

Okay. On ETG, should they continue to improve from the third quarter level?

Again, in terms of our near term, we've been saying that 24% to 26% is the reasonable operating margin. We ran about 26% last year. With the addition of Switchcraft and 3D amortization, that's, if you will, a headwind of about 2%, roughly, in terms of operating margins. That brings to the 24%, which is what we ran this quarter and I think we said in the press release sort of a normalized somewhere around 25%.

Okay. Great. Thanks, guys.

Arnie Ursaner, CJS Securities.

I think most of the questions are focusing on the same issue, which is on Flight Support Group and the changing growth pattern. You mentioned Europe. Did you actually see declines in Europe? As just the very specific follow-up, is currency an impact on your business from Europe?

Arnie, this is Eric. Yes, we did see declines in Europe, but as far as currency, no, I don't really see that as a major impact.

Okay. You did highlight, last year you were up against a pretty tough comp, up 23%, where customers were probably rebuilding some inventories. Perhaps, again, what are your salespeople in the field telling you about customer inventory levels and is it more a short-term timing issue? How should we be thinking about customer inventory levels?

I've heard some other companies talk about rebuilding inventory levels and I'm very in touch with our people. I talk to them all the time. We don't believe that, based on the information that we've seen, that in the third quarter of '11 that it was a rebuilding of inventory. We think that there was some deferred maintenance that basically occurred in 2009 and 2010 and a lot of the equipment was just tired and it ended up getting overhauled in '11. Of course, it's very difficult to see that until after the fact, but, no, we think that the inventories remain extraordinarily lean at our customers. They are basically living hand-to-mouth. We get requests for parts and they need it right away.

Of course, in our business, we receive orders for most of what we ship in the month of shipment. We really don't have a tremendous visibility there, but again, I think things are lean, Europe is weak, but that's being offset by continued new product development and absorption of new products at levels comparable with the past.

That really leads to the question, again, we're grappling with. To the extent you're adding, pick a number, 500 to 700 new products, which has been your driver of organic growth, are there some offsets of products rolling off or are we having less economic impact from the new products you're adding?

No, as far as new products that are being added, I think they're consistent with the past. Yes, we always have products that are rolling off. However, you've also got a maturing of the existing fleet. If you assume, just do simple math, if you assume the fleet is growing by a couple of percent, then obviously, it's also retiring by a couple of percent, but everything that's in the middle is getting a year older and that's getting more in the sweet spot for us. Our numbers have been impacted for some retirements of certain aircraft, some MD-80s, some 747-400s; but, of course that's being offset by the continued aging of the core fleet. We've been able to hold that off.

My final question, if I can, in response to Tyler's question, you mentioned you've got some interesting products that are broadening your capabilities and obviously you don't want to disclose it for competitive reasons, but are they in the commercial aerospace area?

Yes. They're in the commercial aerospace area.

Will they impact the back part of this year or are they more next year?

I would say in the future. I wouldn't consider them in the back part of this year.

Thank you very much.

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

This probably relates to Victor's side of the business more than Eric's. How are you guys planning for this proposed sequestration? What percentage of the business would be subject to that and what are your thoughts on planning for it, should it occur?

J.B., thank you, this is Victor. That's a very good question. We're watching it. Of course, nobody knows what's going to happen now, so there's sufficient uncertainty on that, that we can't get into too much detailed planning. Roughly in the ETG, roughly somewhere in the neighborhood of 30%, 35% of the sales come from defense activities, then you parse that down, you look at what comes from foreign sales and a portion from those and so forth. We hear a lot of people out there saying that in the products that we're doing expect to see something in the 5% range. Those are not our predictions, by the way, those are predictions that we've heard from other people in that range of impact. With all that as the background, our attitude now is to be very conservative in the management of our businesses, not to add overhead, to keep things very lean at this moment, but to keep marketing and selling as we have.

For whatever it's worth, the business has been doing very nicely and the forward outlook on it, overall, with pockets of weakness here and there, overall remains pretty healthy. I think we're just going to have to wait and see where it takes us next year, but the most important thing for us to do is keep this, as we say, lean and mean attitude and be ready and flexible to respond.

When you take out the foreign military sales, other you said roughly 30%, 35% of sales in ETG is defense-related, but it's a smaller number than that once you factor stuff out. What's a good number to think about? Is it 25%? 30%?

You're probably not in a bad ballpark in there. I don't know what it is exactly, but the foreign sales are obviously a smaller minority of the defense business for us.

Right.

J.B., just as further clarification, one of the reasons we're just trying to estimate is because some of our product we may be selling to a US prime, but it's going to an overseas market.

Right.

That's why it's kind of hard to get a really hard, fast number.

That's a good point. That's exactly why.

Right. Okay. FSG, no impact there?

Minimal impact, yes.

Because it's mostly commercial. All right. Okay. Thanks a lot, guys.

Ken Herbert, Imperial Capital.

Eric, first, just wanted to ask, within Flight Support, you had really nice margin improvement on relatively flat sales. I know you talked about mix with, it looks like, the repair business may be down mid single-digits. Was it all mix in the quarter or was there anything else going on specifically to the quarter?

Yes, by the way, the repair business I think was just down a couple of -- like 2% or something. Again, it's very small and of course, in the way we manage the business, a couple percent you really don't see. But no, I would say there was nothing in particular there, other than a continual focus on making sure that we push the highest margin products. There's always got to be trade-offs in various things and the sales folks have a certain amount of time that they're able to focus on various products and our people are very, very much focused there. Nobody at HEICO except for perhaps some sales directors, in certain cases, where we're trying to keep it simple, but nobody's compensated based on sales. People are compensated based on income. When I see the up 7.5%, that's really the key metric internally as opposed to sales. Of course, that's what's having the impact on the operating margins.

Okay. Your focus on the product prioritizing, is that a fair statement for both, obviously, the PMA parts as well as the distribution side of the business?

I'm sorry. The product which?

When you talk about focusing on, obviously, the more profitable products, I understand that from the PMA side, but is that a statement that you would apply as well to the distribution side of the business?

Yes, it applies to everything.

Okay. Just one final quick question, Eric, on FSG. How exposed are you or how important are some of the old CFM56 engines, like the [Dash 3s]?

We're present on them, but it's not a disproportionate amount of our business. The older fleets are not significant there, so we're widely diversified.

Okay. Okay. That's helpful. Thank you. On ETG, it sounds like, clearly, the issues, specifically, with some of the recent acquisitions sounds like you're talking bouts a more normalized margin assumption here moving forward into the latter part of this year and next year. Victor, the question would be, for Switchcraft and for the recent acquisitions, with everything that's happened lately from a macro standpoint, has your fundamental outlook of growth for those businesses heading into fiscal '13 changed at all in the last quarter or since we last spoke?

On that basis for '13, no. At this point, we go into our budgeting season and we put those numbers together so I'd be premature to predict. But at this point, I think the overall, the net outlook for those businesses hasn't changed.

Okay. That's helpful. Thank you very much.

Steve Levenson, Stifel.

I know this is a little bit off the topic, but last night, Qantas cancelled some 787 orders and they're going to keep their older planes in service. Do you think that's the beginning of a trend or do you think it's Qantas-specific, in part due to their location?

As of now, it seems to be Qantas-specific. I've got to tell you and in speaking to a lot of the carriers out there, the new equipment is very expensive. Yes, you get a maintenance holiday and you get improvement in reliability, as well as reduced fuel costs, but you've got to put a lot of people in those seats in order to make that work. Our sense is that the order books are probably somewhat inflated and of course, it depends what ends up happening in Europe and in North America here. There are plenty of storm clouds on the horizon. I think it's certainly a possibility that it could be a sign of additional reductions in orders to come. It depends on the airline that you speak to, but the order books are mighty frothy right now. We're not sure how long that's going to hold up.

Okay. That's good. I appreciate the detail. Does HEICO have like a fleet estimate or retirement profiling estimator? How might that keep planes in service longer and what do you think that does for demand for your products and services?

We look at retirement schedules and we make our own estimate on change in fleet and of course as the fleet comes down and they know that it's going to come down, you've got cannibalization and you've got some deferred maintenance going on. Again, I think HEICO has a structural advantage when it comes to this, because our Flight Support Group is not one monolithic business that does whatever it is, $500 million, $600 million a year in sales. It's made up of these smaller business units with very talented heads and very talented folks within those groups who understand what they have to do to make up the -- to achieve HEICO's growth goals. Our team, I think we've got by far in the Flight Support Group, and Victor can comment on Electronic Technologies, but we've got the best team by far that we have ever had. This team has basically grown up in the business, understands it very well, is very close to their customers and so, therefore, when aircraft come out of the fleet, they don't use that as an excuse.

This is not the kind of Company that runs around with excuses as to why the market may be tough. We figure it out and we just find the opportunities and we find the niches and satisfy our customers' needs. We don't get wrapped around the axle in terms of fleet retirements or age of aircraft because that's not an excuse at HEICO. People want their bonuses, they want to do well, they want to advance and you know what, if the market is providing challenges, they've got to figure out how to overcome them. That's how we've grown from a $25 million business 23 years ago to $500 million, $600 million in sales. I'm confident that our people will continue to seek out those opportunities.

Got it. Thanks. Great answer. On a scale of one to five, where does the CF6 engine sit in importance at HEICO?

I can tell you that HEICO is not dependent on any one platform at all. But for, obviously, for competitive reasons and since our friends from GE are on the call, we really can't say.

Got it. Just a question I've been getting so I figured I'd throw it out there. Thanks very much.

Michael Ciarmoli, KeyBanc Capital Markets.

Tom, maybe if we could go back, just to the beginning to Tyler's line of questioning, I'm still a little bit confused on the fourth quarter ramp in Flight Support. You said acquisitions are going to be a contributor, but it would seem -- you haven't really made any with the exception of CSI, so we would have seen all those already in the business. Flight Support kind of flat organic, it seems to imply that organic revenue in Flight Support could go negative year-on-year next quarter. What am I missing that gets you to that 10% or 11% ramp in the coming quarter?

Yes, Michael. I think the answer is the 11% or 12% forecasted fourth quarter sales growth is primarily in the ETG group, with the acquisition, and a little bit from CSI, although a little bit. Again, roughly flattish organically on a consolidated basis.

Okay. You're going to get the ramp in ETG, so on the Flight Support, are we going to see a ramp in that or are we going to see more of a -- again, I think someone brought up that it was the first quarter it sequentially declined. You get a little bit of a CSI benefit there, but I would imagine with the trends in the market, the data points we've been getting, it's going to be hard to really accelerate that business. Is that the wrong line of thinking?

Again, we hope to do better than our estimates. We always do. But what I'm saying is, inherent in our fourth quarter estimates is roughly flattish organic growth and I think that's generally what the market is saying in terms of aftermarket. Keep in mind that, as Eric mentioned, we had 23% organic growth last year in the third quarter. We actually had about 20% organic growth in the fourth quarter of last year, which was following about a 14% organic growth in the fourth quarter of 2010. We've got some really tough comps in the fourth quarter, as well. But again, what we're hearing in terms of broad brush estimates for aftermarket is sort of flattish organic growth in the second half of fiscal or calendar 2012 and that's kind of what we baked into our estimates but, obviously, we hope to do better.

Okay. Are you seeing any meaningful changes in customer behavior as you've gone through month by month on the quarters or even from July to maybe the first three weeks of August, or is pretty much those trends stable with just what you said, that flattish organic?

Michael, as you know, we can't comment on August at this point, other than to say that much of Europe is on vacation as usual.

Right.

Probably wouldn't be that indicative even if we could comment. But no, I mean, I think everything's consistent with what we reported and stated so far.

Okay. What is the expected tax rate for the full year?

As Larry mentioned, for the fourth quarter it's estimated about 34.5%, a more normal rate.

Okay.

You blend it for the fourth quarter to what we've had you can calculate it.

Perfect. In terms of your maybe servicing side of the business, how should we think about American Airlines as they're moving through their bankruptcy, are you thinking that you could pick up some incremental business opportunities there or are they materializing already?

Again, we can't comment on specific opportunities, but I can tell you that our repair and overhaul business is very competitive and extremely well-run.

Okay.

We're working on many opportunities out there. We're picking up market share. Again, 15 years ago, HEICO wasn't even in the component overhaul business and today, I think we probably have the largest independent component overhaul business in the United States. We're continuing to drive that efficiency, listening to our customers as to what they want, so I think there's going to be opportunity for us in all sectors of the market, America, Europe, as well as Asia.

Okay. Outstanding. Great. Thank you very much, guys.

Chris Quilty, Raymond James.

Eric, just a follow-up on the issue of the repair business. This was the first quarter I recall you talking about a decline or did you also experience a decline in the prior quarter? Can you talk about whether you look at the repair business as leading, trailing, or coincident factor with the overall PMA parts business?

Chris, those are good questions. With regard to the repair business, it was down, I don't know, like 2% or something, which is really a tiny, tiny number and again, our people are focused on operating income and not sales. Sales is really just a byproduct. It sort of is what it is. I don't get too wrapped around the axle on that. But with regard to comparisons to prior periods, I can't recall where it's been off in the past. But again, we're focused on the higher margin opportunities. In the repair business, there are periods where you've got service bulletins that have to be accomplished or special projects that are out there, which can make one quarter, another quarter higher or lower. But I would not view it as really much of an indicator or anything other than just natural fluctuation in the business.

Got it. Fair enough. Thank you, gentlemen.

Ron Epstein, Bank of America.

It's Elizabeth in for Ron this morning. We were just wondering how you're thinking about aftermarket going into 2013? I know there's been a lot of discussion about the last quarter and the fourth quarter, but how you're thinking about it next year?

Hi, Elizabeth, this is Eric. Obviously, we look at what the change in the fleet is and what the available seat miles out there are. I think it's going to be somewhat consistent with levels that we've seen over the last quarter, with a moderating. You've got this issue where, who knows what's going to happen with some of the manufacturer backlogs out there, with all this new equipment on order. I can tell you personally, if I were an airline, I wouldn't be looking to put a lot of capital into a business which has razor thin margins. I would want to try to conserve that capital and that may be a theme that could help us down the road, but we're prepared for it either way. If the older equipment stays in service longer, great and if not, not.

We're building our business plans around the most conservative forecast. Europe doesn't appear to be getting any stronger, but Asia is doing decently and the Americas are somewhat flattish. South America is doing pretty well, though. But again, none of those are excuses at HEICO. Our people want to move forward and they want career opportunities going forward and they can't blame anything on a slowing economy or headwinds from Washington or anything like that. We're just very much focused down in the weeds in terms of by part, by customer what we're selling and that's really how we're building the business case. But I would say macro, overall, somewhat consistent with what we've seen over the last quarter or so.

Okay. If you break out the defense business specifically across the Company, how did that perform in the quarter?

This is Victor. It's mostly in the ETG, but across the Company, defense business did pretty nicely in the quarter. We were happy with it and it grew.

Like single digits or --?

Yes, yes.

Okay. Great. Thank you.

(Operator Instructions)

Julie Yates, Credit Suisse.

You guys have called out the specialty products. I think it's contributed about additional $15 million of incremental revenues so far this year. How big is the specialty industrial products within Flight Support and then, what is the visibility and outlook for these products over the next, say, 12 months?

Julie, this is Tom. The answer is, it's growing from zero a couple years ago to that $15 million. Most of that growth is again off a very, very small base. It's not a significant component. It's certainly less than 10% and again, it's gone from nothing to the organic growth numbers we're reporting. I think in terms of opportunity, we see continued opportunity to add that at a single-digit rate. Visibility is on a longer term basis. A lot of the initial build had to do with some of the noise and pollution standards, but I think we still see that as a long-term growth opportunity, lot of off-road and heavy industrial stuff and I think we see that as a stronger growth market going forward.

I would agree with that. I think that there's some short-term concern, just generally economic concern. But again, our folks don't use that as an excuse and if one area slows down, they're very much focused, incentivized and motivated to win and find another area that pulls ahead. I think some of the big growth that we've seen in the past may be moderating for the short term, but we've got some really great plans going forward and that business is incredibly well run. I think we're working all sorts of opportunities that will continue its growth in the intermediate term.

Eric, did that specialty products line, did that originate out of an acquisition that you guys made or what was the catalyst for getting into that market?

Technically everything came ultimately out of an acquisition because we've acquired so many businesses, but it came out of an acquisition more than 10 years after we acquired it. I would say no, it was not something that was acquired. It was something that was developed while HEICO owned the business for a decade.

Julie, I just want to put my two cents in here, in observing how we manage the Company and the people that we put in charge of various subsidiaries. If you had or anybody else had the opportunity to meet I'd say 80% to 90% of the people, the other 10% don't really qualify in the same way. They're good, but not super good. The people that we have in the field that are operating, the heads of these businesses, are very unique individuals. They are not cut from a corporate mold. They are not excuse guys; well, I couldn't do it because this happened and business is down, so woe is me. These are people who think ahead two, three, five years ahead, look at, for example governmental regulations, EPA regulation, things that are coming down the road, plan for it, set up small test facilities to see if that product is going to work, put a lot of money into R&D with our approval, to meet a demand which is coming down the road. They have tremendous vision.

The other thing, I think we benefit by being a small, flexible Company in that the management who is sitting in this room and you know us very well, we will think and authorize and there's no red tape if somebody who is well-known to us with great skill and vision says I want to go after this product and I think it's going to be a great market and explains why; we just say go. That strategy has served us and the shareholders very, very well. When we're talking about these industrial products, as Eric said, nothing -- it didn't exist. It came into existence after we bought the Company. We didn't acquire that line of business. We collectively invented it, but the guy who was running that unit is superb, as are many, many business unit heads out in the field.

I think that's something that you can't quantify on a balance sheet or P&L statement or anything else, but it's a unique quality which is the culture of HEICO. I think to a great extent these new products that you see, these new creative things are coming out of the minds of highly motivated people. These people are paid to grow their businesses and come up with new products and go against the stream of recession and all that kind of stuff and they want their pound of flesh. They want their big bonuses and some of them are huge and I think some of them are bigger than our bonuses, but it's our pleasure. They earn it. God bless them. That's a great motivation.

Okay. Great. Thanks, Larry. Maybe my final question is if you could give us an update on the M&A pipeline? What sorts of properties you're seeing and the pricing.

We are seeing -- it kind of ebbs and flows. We are seeing a number of properties that have landed on Bill Harlow's desk and my desk and of course, Eric and Victor. We're going through due diligence. We have due diligence meetings on various companies, some are relatively large for us, some are standard size for us. I think there are plenty of opportunities out there. By definition, if we're interested, they have to have good margins or else we're not interested. They are businesses which would fit into our portfolio of businesses. We're in due diligence on a number of these different things, kicking the tires, looking at them and so forth.

As you know, it's not over until the fat lady sings and until we're at the closing table and the money transferred, we can't predict. But I can tell you we are looking at a number of them. Most of them within the target range that we pay. In one instance, there's a Company which is above the target range which we normally pay but we perceive that there would be synergistic benefits that would bring it really to the target price that we pay. That's actually exactly what's happening and the prediction, will we do it, won't we do it? Just the law of averages says we're going to do some, but I can't point to one and say yes, we're going to do this tomorrow afternoon.

Okay. Thank you.

Herbert Wertheim, Brain Power Incorporated.

As you know, I'm one of your cheerleaders. I've been with you for 23 years now. We own almost 5 million shares of your stock. Talk about the entrepreneurial spirit of the rest of your organization, I just want to say that my standpoint, the three of you, management team, have done a spectacular job for our family and our foundation and want to say thank you for all you've done.

Herb, I thank you very much. You have been a great, loyal, long-term shareholder and I feel particularly good that I could look you in the face and have lunch with you and say Herb, we did a good job for you. You are too kind in your words. We appreciate them and you know us very, very well. Thank goodness you have been very well-rewarded for your trust and confidence. We appreciate your share ownership and being part of the support team and thank you very much.

Looking forward to the next 23 years, Larry, so keep up the good work.

At this time, there are no further questions.

In that case, again, I want to thank all of you for listening in and for your interest in HEICO and what we do. If you do have questions between now and the next fourth quarter conference call, which will be sometime in December, please give us a call. We'll be happy to try to be responsive. For those of you who haven't seen it, the market reacted very positively to the announcement and at this moment the stock, HEI, was up $3.30 on Big Volume and the A was up $2.36 on Big Volume for that. I take it that the market has assessed that we had a good quarter and we will continue to work hard to keep up the good work.

I thank you and we'll speak to you next time.

Thank you for joining today's conference call. You may now disconnect.