HEICO Corp (HEI) 2012 Q4 法說會逐字稿

Ladies and Gentlemen, thank you for standing by, and welcome to the Fiscal 2012 fourth quarter and full year-end results. All lines have been placed on mute to prevent any background noise. Before we begin, let me mention that 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 costs to complete contracts; governmental and regulatory demands; export policies and restrictions; reductions in defense, space, or Homeland Security spending by US and/or foreign customers; or competition from existing and new competitors which could reduce our sales; Heico's ability to introduce new products and product pricing levels which could reduce our sales or sales growth; Heico's ability to make acquisitions and achieve operating synergies from a 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 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 Forms 10K, 10-Q, and 8-K. We undertake no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events, or otherwise. Thank you, it is now my pleasure to turn the call over to Laurans Mendelson to begin. Please, go ahead.

Thank you, very much. And, good morning to everyone on the call. We thank you for joining us and we welcome you to this Heico fourth quarter and full fiscal 2012 earnings announcement teleconference. I'm Larry Mendelson, Chairman and 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; Tom Irwin, Heico's Senior Executive Vice President; and Carlos Macau, our Executive Vice President and CFO.

Now, before reviewing our operating results in detail, I would like to take a few moments to summarize the highlights of our record setting fourth quarter and full year results. As you now know, consolidated fourth quarter net sales, operating income, net income, and cash flow from operating activities represent all-time record quarterly results for Heico. And, this is driven principally by record net sales and operating income within our Electronic Technologies Group as well as record net sales and continued strong operating income within Flight Support. Our fourth quarter results marked the 11th consecutive quarter of consolidated net sales growth. Consolidated Fiscal 2012 net sales, operating income, and net income also represent all-time record fiscal results for Heico and this is driven principally by record results within both of our operating segments.

Consolidated fourth quarter 2012 net income and operating income increased by quite a large amount, 29% and 22% respectively, on an increase of 16% in net sales over the fourth quarter of '11. In addition, our consolidated operating margins improved to 18.8% in the fourth quarter of '12, and that's up considerably from 17.9% in the fourth quarter of '11. Consolidated Fiscal 2012 net income and operating income increased 17% and 18% respectively on an increase of 17% in net sales over the full Fiscal '11. Additionally, our consolidated operating margins improved to 18.2% for Fiscal '12, up from 18.1% in Fiscal '11. ETG set a quarterly net sales record in the fourth quarter of '12 improving 45% over the fourth quarter of '11. The increase in net sales reflects organic growth of about 11% and additional net sales contributed by four acquisitions since the third quarter of '11.

FSG set a quarterly net sales record in the fourth quarter of '12, improving by 4% over the fourth quarter of '11. And, that increase in net sales reflects organic growth of approximately 2% and additional net sales contributed by two acquisitions during the fourth quarter of '12. Consolidated net income per diluted share increased 29% to $0.45 per diluted share for the fourth quarter of '12. And, that's up considerably from $0.35 in the fourth quarter of '11 as a result of continued strong performances in both of our operating segments. Cash flow and balance sheet remains very strong. Cash flow from operating activities was a record $139 million in Fiscal '12 compared to $126 million in '11. And, as of October 31, the companies net debt to equity ratio was a low 15.3% with net debt, which is total debt less cash, of about $110.4 million.

In August 2012, we acquired 84% of the assets and assumed certain liabilities of CSI Aerospace, a leading repair and overhaul provider of specialized components for airlines, military, and other aerospace related organizations. And, we believe the acquisition of CSI will augment the already extensive offering of our aircraft component repair group and that this acquisition is consistent with our strategy of offering customers advanced and cost saving aircraft maintenance alternatives. In October 2012, we acquired 80.1% of the assets and assumed certain liabilities of Action Research Corp. Action Research is an FAA approved repair station that has developed unique proprietary repairs that extend the lives of certain engine and airframe components. We believe the acquisition of Action Research will complement our already existing ability to bring high quality aircraft maintenance alternatives to our customers. We do expect both of these acquisitions to be accretive to our earnings per share within Fiscal 2013.

As all of you know by now, in November of 2012, our Board of Directors declared an acceleration of our regular semi-annual $0.06 per share cash dividend, as well as a special and extraordinary $1.14 per share cash dividend on both classes of our common stock. Based on the strong enthusiasm from our shareholders after that announcement, our Board announced in December an additional $1 increase per share. So that the total special and extraordinary dividend will now be $2.14 per share on both classes of stock. The dividend will be paid in one payment on or before December 31, 2012, in view of impending tax increases expected to take effect in calendar '13. As a reminder, we also, the company, executed a five for four stock split of its shares in April 2012.

In total, then, we declared or paid $2.32 in cash dividends on both our Class A common stock and common stock during the past 12 months. The split and cash dividends demonstrate our continued commitment to delivering value to Heico shareholders and to superior long term shareholder return. Last week, as we announced, we entered into an amendment to extend the maturity date of our revolving credit facility by one year to December 2017. And, also, we amended certain other covenants to provide us with additional financial flexibility. I would now like to introduce Eric Mendelson as Co-President of Heico and President of Heico's Flight Support Group, and he will discuss the outstanding results of the Flight Support Group.

Thank you. Net sales of the Flight Support Group increased 4% to a record $149.7 million in the forth quarter of 2012, up from $144.4 million in the fourth quarter of 2011. The net sales increase is principally attributed to organic growth of approximately 2%, an additional net sales of $2.7 million contributed by acquisitions. The organic growth in the Flight Support Group primarily reflects increased market penetration from both new and existing product offerings for certain of our aerospace products and services resulting in an aggregate increase of $7.2 million in net sales from our after market replacement parts and repair and overhaul services product lines reflecting organic growth of approximately 6%. The aforementioned increases to our net sales were partially offset by a $4.6 million decrease in net sales within our specialty product lines, principally reflecting normalization in demand as compared to the fourth quarter of 2011.

Net sales of the Flight Support Group increased 6% to a record $570.3 million in Fiscal 2012, up from $539.6 million in Fiscal 2011. The net sales increase in Fiscal 2012 principally reflects organic growth of approximately 4% as well as additional net sales of $9.1 million contributed by acquisitions. The organic growth in Fiscal 2012 principally reflects increased market penetration from both new and existing product offerings for certain of our aerospace products and services resulting in an aggregate increase of $11.3 million in net sales from our after market replacement parts and repair and overhaul services product line representing organic growth of approximately 3%. Additionally, the organic growth in the Flight Support Group reflects an increase of $10.3 million in net sales within our specialty product lines, primarily attributed to the sales of industrial products used in heavy off road vehicles as a result of increased market penetration. Organic net sales growth in the Flight Support Group has now averaged approximately 13% over the past two fiscal years.

Operating income of the Flight Support Group was $25.4 million in the fourth quarter of 2012, compared to $26.6 million in the fourth quarter of 2011. The slight decrease in operating income is primarily attributed to the previously mentioned normalization of demand within our specialty industrial product lines. Operating income of the Flight Support Group increased 9% to a record $103.9 million in Fiscal 2012, up from $95 million in Fiscal 2011. The increase in operating income for Fiscal 2012 principally reflects the increased sales of higher margin products within our after market replacement parts and repair and overhaul service product line.

The Flight Support Group's operating margin was 17% in the fourth quarter of 2012 compared to 18.4% in the fourth quarter of 2011. The decrease in operating margin principally reflects the dilutive impact of inventory purchase accounting adjustments for recent acquisitions. And, certain year-end valuation adjustments, including a non-recurring positive valuation adjustment of approximately $900,000 in the fourth quarter of 2011. The Flight Support Group's operating margin improved to 18.2% for Fiscal 2012, up from 17.6% for Fiscal 2011 principally reflecting the previously mentioned increased sales of certain higher margin products. I would like to introduce Victor Mendelson, Co-President of Heico and President of Heico's Electronic Technologies Group, to discuss the record results of the Electronic Technologies Group.

Thank you, Eric. Net sales of the Electronic Technologies Group increased 45% to a record $94.4 million in the fourth quarter of Fiscal 2012 up from $65.3 million in the fourth quarter of Fiscal 2011. The net sales increase is principally attributed to additional net sales of $21.6 million contributed by acquisitions and organic growth of approximately 11%. The organic growth in the fourth quarter of Fiscal 2012 was mostly from an increase in demand and market penetration for certain of our space, defense, aerospace, and electronics products. Net sales of the ETG increased 46% to a record $331.6 million in Fiscal 2012, up from $227.8 million in Fiscal 2011. The net sales increase for Fiscal 2012 resulted mainly from additional net sales of $87.4 million contributed by acquisitions since the third quarter of Fiscal 2011 and organic growth of approximately 7%. The organic growth for Fiscal 2012 principally reflects an increase in demand and market penetration for certain of our defense, space, electronics, aerospace, and medical products.

Organic net sales growth in the ETG has now averaged approximately 8% over the past two fiscal years. The ETG operating margin, income, excuse me, the ETG operating income increased 67% to a record $25 million in the fourth quarter of Fiscal 2012, up from $14.9 million in the fourth quarter of Fiscal 2011. And, increased 30% to a record $77.4 million in Fiscal 2012, up from $59.5 million in fiscal year 2011. These increases are mainly the consequences of increased sales volumes. The Electronic Technologies Group's operating margin improved to 26.5% for the fourth quarter of Fiscal 2012, up from 22.8% in the fourth quarter of 2011. The improved operating margin is primarily attributed to increased sales volumes of higher margin products.

The Electronic Technologies Groups operating margin was 23.4% for Fiscal 2012, compared to 26.1% in Fiscal 2011. The decrease in operating margin principally reflects the dilutive impact of approximately 4% from lower operating margins realized by the 3D Plus and Switchcraft acquisitions in 2011. These lower operating margins are mostly attributable to amortization expense associated with intangible assets and inventory purchase accounting adjustments aggregating approximately $10 million during Fiscal 2012. Now, I'll turn the discussion back to Larry Mendelson. Thank you.

Thank you, Eric and Victor. Moving on to earnings per share, as I mentioned earlier, diluted earnings per share increased 29% to $0.45 per share in the fourth quarter of '12. That was up from $0.35 in the fourth quarter of '11. And, they increased 17% to a record $1.60 for Fiscal '12 and that's up from $1.37 in Fiscal '11. Be reminded that all Fiscal '11 diluted earnings per share amounts have been adjusted retrospectively for our five for four stock split which we distributed in April 2012.

In depreciation and amortization, the expense increased to $8.5 million in the fourth quarter of '12 up from $5.1 million in the fourth quarter of '11. And, it increased to $30.7 million in Fiscal '12 up from $18.5 million in Fiscal '11. And, the increase in both the fourth quarter and the fiscal year 2012 primarily reflects higher amortization and depreciation expenses related to six acquisitions completed since the third quarter of '11. Amortization expense of the acquired intangible assets total $4.5 million in the fourth quarter of '12, and $16.2 million for Fiscal '12. And, that's up from $2.2 million in the fourth quarter of '11 and $7.6 million for Fiscal '11.

R&D expense increased 12% to $8 million in the fourth quarter of '12, and that's up from $7.1 million in the fourth quarter of '11. And, it increased 20% to $30.4 million in Fiscal '12, up from $25.4 million in Fiscal '11. Significant ongoing new product development efforts are continuing at both Flight Support and Electronic Technologies as we reinvest approximately 3% of each sales dollar in R&D. We do believe that our unwavering commitment over the past 22 years to invest in new product development has proven very effective in allowing us to offer customers lower cost and/or innovative products and it continues to be a significant part of our long term earning growth strategy. We do intend to continue investment in R&D during 2013 at similar levels that we did in 2012.

SG&A expenses increased 20% to $44.1 million in the fourth quarter of '12, up from $36.9 million in the forth quarter of '11. And, they increased 21% to $164.1 million in Fiscal '12, up from $136 million in Fiscal '11. And, the increase in SG&A in the fourth quarter and the full fiscal year principally reflects the newly acquired businesses, most of it being amortization. The SG&A expenses, as a percentage of net sales, increased to 18.2% in the fourth quarter of '12 up from 17.7% in the fourth quarter of '11. And, they increased to 18.3% for Fiscal '12, up from 17.8% in '11. And, the increase in the SG&A expense, as a percentage of net sales, in both the fourth quarter and Fiscal '12 represents an increase in amortization expense of intangible assets from acquired businesses.

Our interest expense increased $2.6 million and $2.4 million in the fourth quarter and fiscal year 2012, not very much in either case, and that's due to higher -- principally to higher weighted average balances outstanding under our revolving credit and this was associated with the recent acquisitions. The outstanding debt balance was $131 million as of October 31, 2012, and at a weighted average interest rate of approximately 1.2%. Other income and expense in '12 and '11 was not significant. Our effective tax rate was 35% in the fourth quarter of '12 compared to 34.6% in the fourth quarter of '11, and for Fiscal '12 was 33.8% versus 31% in Fiscal '11. The increase in the effective tax rate is partly attributed to the retroactive extension in R&D tax credits to cover the two year period ending December 31, 2011. And, this resulted in the recognition of an income tax credit for qualified R&D activities for the last 10 months of Fiscal '10 and the first quarter of Fiscal '11 and it reduced the recognition of such income tax credit to just the first two months of qualifying R&D activities in Fiscal '12. It's a little complicated, if you want further clarity on that, Carlos and Tom Irwin will be able to give it to you in the Q&A.

Additionally, the comparative increase in the effective tax rate in '12 reflects our purchase of certain non-controlling interest as well as the benefit from state income apportionment updates recognized last year upon filing of the currently due tax returns and the amendment of certain prior year state tax returns. The effective tax rate of 35% in the fourth quarter of '12 is in line with our estimated effective tax rate that we're projecting for 2013. Net income attributable to non-controlling interest totaled $5.5 million in the fourth quarter of '12 compared to $5.9 million in the fourth quarter of '11. Net income attributable to non-controlling interest was $21.5 million in Fiscal '12 compared to $22.6 million in Fiscal '11. And, you'll note that the decrease in both periods principally reflects the previously mentioned purchase of certain non-controlling interest by Heico during Fiscal '11 and '12. And, this resulted in lower allocations of net income to those non-controlling interests.

Moving on now to the balance sheet. As I mentioned earlier, our financial position and cash flow remain extremely strong. And, cash flow from operating activities in the full Fiscal '12 totaled a record $138.6 million representing 163% of net income. And, that was up from $125.5 million in the full Fiscal '11. Cash flow from operating activities in the fourth quarter of '12 was $60.3 million and that was up from $40.5 million in the fourth quarter of '11. Working capital ratio continues very strong at 2.8 as of October 31, and that compared to 2.6 as of October 31 of '11.

DSOs, or receivables, decreased to 46 days from 47 as of October 31, 2011, and we monitor receivable collection efforts in order to limit our credit exposure. We do pretty well in that area. No one customer accounted for more than 10% of sales and our top five represented approximately 15% of consolidated net sales for Fiscal '12 compared to 17% for Fiscal '11. This is one of our strategies. As I've told many people in meetings, Heico wants to continue to diversify customer. We don't want customer concentration, product concentration, product line concentration, and we constantly try to diversify. And, that's what you're seeing as our customers, our top customers, are representing lower and lower percentages of our total business.

The turnover rate of 114 days in inventory at October '12 was approximately the same as 113 days as of October 31, '11. CapEx in Fiscal '12 were $15.3 million and depreciation expense, which includes tooling amortization, was $13.7 million. The company's net debt to equity was a very low 15.3% as of October 31, '12, and net debt, I think I mentioned earlier, was $110.4 million.

Now, moving on to our outlook. As investors have come to know and expect, Heico prefers to issue conservative December estimates which are based upon more certain knowledge and we try to avoid future speculation. If and when business events become clearer as the year progresses, we have typically, in past years, increased our estimates. As an example, our net income estimate for Fiscal '12, which we issued in December '11, projected growth of 10% to 12%. Final 2012 results were growth of 17%. We hope that we will be able to do the same as Fiscal '13 progresses.

Now, as we look ahead to Fiscal '13 the general overall economic uncertainty surrounding the domestic fiscal cliff and the Euro zone recession may moderate growth in our principal markets. We do remain optimistic in our ability to execute a disciplined flexible growth strategy while navigating these challenging macro environment economic circumstances. While some commercial aviation industry participants have indicated the potential for an acceleration of growth in airline capacity as well as maintenance spending in 2013, to date we have not seen signs of a significant recovery in customer demand. Therefore, we are currently estimating growth in Fiscal 2013 full year net sales and net income of approximately 5% to 7% over 2012 with consolidated operating income margins approximating 18%. 70% to 80% of the growth is expected to be organic, principally occurring in the second half of 2013. And, these estimates include acquisitions completed to date but do not include, and of course exclude, the impact of additional 2013 acquisitions if we do any.

If our commercial aviation markets experience an accelerator recovery, or if an effective resolution to the domestic fiscal cliff allows our customers to pursue more aggressive strategies, we would expect to improve on these sales and earning growth targets. I'm sure I don't have to remind our listeners that Heico has been active in the acquisition world. And, personally, I feel quite confident that during 2013, we will make some of these acquisitions that we're working on and some that we haven't even seen yet. And, I would expect to hopefully announce better growth as the year moves on. Consistent with our long term growth goals, management continues to target net income growth averaging 20% over the next one to three years including the effects of these additional potential acquisitions. Fiscal 2013 cash flow provided by operating activities, which do not include future acquisitions of course, is expected to remain very strong and approximate $140 million. CapEx in '13 expected around $18 million to $20 million and depreciation amortization in '13 approximately $35 million.

In closing with our prepared remarks, I want to thank the Heico team members. It is through their dedication and efforts that we have achieved significant 22 year compound annual growth of 17% in net sales and 19% in net income. And, we believe that the focus on developing new products and services, as well as increasing our market penetration while maintaining a very strong financial position, very disciplined acquisition strategy, will provide opportunity for continued substantial growth and profitability. This strategy has served Heico and its shareholders very well in the past and we do not intend to change any of our basic strategies. And, with that, I would like to open the floor for any questions that the listeners may have.

Thank you.

(Operator Instructions)

Julie Yates Stewart, Credit Suisse.

Good morning.

Good morning, Julie.

Question on the organic growth outlook. Larry, can you help set expectations between ETG and FSG for FY '13? I think ETG came in a little bit better than most expected this year. And then, looking at the last three years the growth between the two segments has been roughly equal on average. So, how do we think about this going forward?

Julie, I'm going to ask Tom to respond to that.

Yes, Julie, with respect to our Fiscal '13 estimates at the 5% to 7% growth level, and that would contemplate organic, as it said, roughly 70% to 80% organically. And, it was pretty consistent within both of the segments, that is the organic growth inherent in our estimates is about the same in both industry segments, including some caution, if you will, with respect to defense within the electronics business.

Okay, and then, Eric, this one is probably for you. On the normalization of the specialty products demand you saw that as a headwind in FQ4. Is this a headwind that continues into FY '13?

Yes, we see it definitely continuing into the first quarter, maybe even the first half of FY '13. But, we do expect this to turn around as the year moves on. Of course, there's been a lot of hold back in spending, which we've all seen in many investment areas as a result of the fiscal cliff and concerns over the economic situation, and that's what is driving this.

Okay, great, thank you.

Thank you, Julie.

Arnie Ursaner, a private investor.

I'm with CJS Securities, a little different than a private investor. Good morning.

Good morning, Arnie. I was wondering if you had retired and just gone to managing your own personal portfolio.

Well, I'll tell you, I've thought about it, but not today. Two questions related to ETG. Are you actually seeing changes in activity from clients over fear of sequestration or do you expect to see it?

Arnie, this is Victor. I think we expect to see it. We really haven't seen it much at this point, if at all.

Okay.

But, I would expect to see it at some point. Maybe we're seeing a little bit of it now, but the general consensus, I think, is that this will layer in over time in 2013, if it happens and to the extent it happens.

This is Larry, Arnie, just to put it in context, I think you might know this but others may not, we do about 20% as total defense. And, if the sequestration resulted in 10%, we're talking about what I consider would be 2% exposure to our top line, not significant. And, even that, because we're in electronic areas, we aren't making truck bodies and armor and stuff like that, I'm not expecting to see a real big problem from the sequestration. I guess it can't help, but I think most of our programs are fairly safe.

Second question on ETG is in your view towards '13, you mentioned you expect operating margins that approximate those of Fiscal '12. But, in Fiscal '12 you had a 400 basis point headwind from some accounting and other issues. Were you implying that excluding that 400 basis points? And, if not, why would they be down that much? Thanks.

Arnie, Tom will respond.

Yes, Arnie. Again, with respect to our estimates in Fiscal '13, inherent in those estimates is probably about 200 basis point estimate of decline in operating margins in ETG from what we experienced this year. That is full year this year was 25% at roughly mid-23% or roughly for the full year about 23% would represent mostly additional amortization and then some mix. As Eric and Victor have talked about, we have varying margins on a number of product lines.

In ETG, we have some very, very profitable margins that contributed quite favorably. Specifically, we spoke about 3D and how its recovered in the second half. If you normalize that and take the amortization of the two larger acquisitions last year, we've tempered, again, tempered the ongoing operating margins a bit. But, again at 23%, we really think they are very, very strong and reasonably sustainable.

Incidentally, Tom, in the 23% has been deducted approximately what for amortization?

Yes, typically amortization in ETG runs about 4%. We're talking about consolidated amortization of roughly $17 million to $18 million inherent in our estimate for 2013 and most of that is in the ETG group.

Arnie, management adds back the amortization. Of course, for GAAP we have to deduct it. But, the way we look at it, we just add about the 4%, the amortization. So, if we have a 23%, in our minds it's 27%. When we acquire companies we also -- they sell them, we buy them based on that number without the amortization. Because this is -- and of course we don't deduct amortization for cash. So, the cash flow flows through.

Okay. Again, maybe I'm confused, but you were 26.5% in Q4 where you still had some of these impacts, 23% for the year, 27% if you add them back. And, you're saying there will be 200 basis points next year, I guess I'm somewhere between the 23% and 27%, maybe I could try and ask it one more time and see if I can pin you down a little bit.

Well, again, as we've spoken about in ETG, the margins typically move around quite a bit. And, last year, as an example, they were in the 20% up to, as you're pointing out, to 26.5% in the fourth quarter. I think what we're saying is that on a full year basis, they may move around quarter by quarter, but on a full year basis we wouldn't expect to do the 26.5%. Again, mostly mix, and again of the -- amortization will continue. The purchase accounting is largely behind us. But, again, based on mix, we're more comfortable in the mid-23% versus, again, what averaged the second half of 2012 was more in the 25% range.

What I think, Arnie, the bottom line to it, as Tom says, we are projecting that the mix will change and it will be slightly less profitable looking through all of the product lines. It also depends on what happens during the year, what the throughput is, the volume. And, I think we've taken a conservative view. And, if it's better, we'll be happy, and if it's not, we think that barring the bottom falling out of the world, and everything else, that we're projecting very conservatively.

See you guys in January, thank you.

Thank you, Arnie.

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

Can you hear me okay?

J.B., yes, we can now.

Great, okay, hello. Had a question on prioritization of cash flow. You're going to have, with the dividend payment, you'll have a little bit of debt, a little bit, but can you talk about what the prioritization of cash flow is going to be in 2013?

Well, truthfully, the prioritization is going to be to try to make as many acquisitions as we can. That the debt -- if our net debt was $110 million at the end of the year and we borrow, what do we borrow, $117 million, so it's $227 million. And, our debt is, maybe, with that before any pay down, it would be approximately one-time EBITDA. So, it's very low. We're going to try to find as many acquisitions that make sense to us as we possibly can to build that. We are not -- as you know, we're not a capital constrained company. We'll generate in free cash flow next year --.

Around at least $100 million.

$100 million, so at the end of next year we'll be, give or take, assuming no further acquisitions, we'll be one turn, one half a turn of EBITDA. So, it's nothing. So, we're going to put as much money out as we possibly can and that's what we're going to do.

We haven't focused on dividend policy, and next year some of -- we will, obviously, I believe, unless the dividend tax becomes as onerous, the 45% that's being projected, then maybe we're considering other methods of paying dividends. You could pay a stock dividend so people get capital gain treatment on the stock and the sale if they wanted. But, I think that we're going to be spending, acquiring, paying dividends similar -- I don't want to say the same kind of $2.20 dividend that we paid, but I think that it's going to be business as usual. There will be no constraints to our spending.

Good, and then, within -- I'm assuming most of the acquisition focus would probably be on the ETG side just because there's probably more different kinds of opportunities, but are there particular segments there that have an interest to you?

First of all, we are looking at transactions in both segments as we always do. And, we, as you know, are opportunistic buyers so we're going to be buying wherever the opportunity exists. We don't favor one or the other. As far as specific segments, I'll let Victor answer that. He's looking at different companies. There are some very interesting companies out there. Victor, do you want to comment?

Yes, hello, J.B. I would say that it's pretty much more of the same. The interest that we've had in the past will mirror what we're interested in the future. As you heard, we're going to be opportunistic as we've been. We particularly do like space businesses. We are -- historically, we haven't been enamored of ground equipment. And, my sense is that will continue to be the case.

Upper end items, higher margin that require a fair amount of engineering going in. A lot of smaller production runs. And, generally speaking, I think subcomponents. And, if we can find those, we're somewhat agnostic as to whether they go into space or aircraft. Although, as I said, we've done very well in the space markets.

And J. B., this is Eric. I can tell you we're also looking at acquisitions within the Flight Support Group. And, there are plenty of candidates in there as well. We've been, as everybody knows, fairly conservative. We started seeing some aftermarket weakness a number of months ago and we've been conservative with our projections. And, as a result, we've been able to do a couple of deals and I'm optimistic that we will be able to do more.

And, just one last one. Eric, just with respect to, I don't know how you measure it, RFP activity or that sort of thing. I mean there's been talk of aftermarket being soft for 12 to 18 months and we're, I guess, roughly 6 months into that. Can you talk to us about the trajectory of inquiries and how that's been going currently?

Sure. As everybody knows, the airlines deferred a fair amount of maintenance in the 2009 and early 2010 area. And, of course we saw that snap back in demand in second half of 2010 and really 2011 where we were up 20%-something, or 23% organic growth. So, we expressed some caution roughly a year ago that obviously that that can't continue in perpetuity. Airlines were not, in our opinion, restocking in that they weren't building up their inventories but these were parts that were going into the overhaul and repair of engines and components and airframes. But then, of course, with the general economic situation slowing down in 2012, that had a negative impact there.

In speaking to our customers, they continue to maintain very lean inventories. And, as everybody knows, we have a 10/31 year-end. And, the two shortest months of the year for us, due to the number of vacation days, are November and December. In addition, with most of our major customers reporting a 12/31 year-end, they have programs to reduce inventory as much as possible. So, historically, November and December have always been lean months for us. January, on the other hand, is a month with a lot of the days and typically, our January month has dictated the results, has driven the performance in the first quarter.

So, in our business we continue to get most of the orders in the month of shipment because we've got the parts on the shelf. So, it's very difficult to predict what the beginning of next year is going to look like. If it is consistent with prior years, we've done very nicely in January. But, it's always -- we're a conservative company and we don't like to promise something unless we are certain that we're able to deliver it. But, I can tell you in speaking to airlines they've got significant programs to reduce their inventories in November and December. And, I think that's consistent with what we're seeing. For anybody whose been flying out there on the airlines, as I have and as you have, you see that the flights are quite full.

So, there has been some talk in the investor markets and some of the investor conferences, including yours, that we've attended with investors speaking about a recovery in demand. So, logically, that should happen, but for us to say that it's going to happen we prefer to first see the evidence. So, I'm sorry, that's a long explanation but it gives you some color of what we're looking at.

No, super thorough. I appreciate it and congratulations to all of you on a great year, thanks.

Thank you.

Tyler Hojo, Sidoti & Company.

Thank you, everyone. Just to follow on with the last question. What specifically is the air traffic growth, or the capacity growth, forecast that's embedded in the Fiscal '13 guidance?

Tyler, this is Tom Irwin. I would say most of what we're reading, in terms of estimates and early discussions, is probably airline capacity growing in FY '11, or say calendar '11, somewhere between 2.5% and 4% or 5%. So, I would say low single digits to, on the upper range, mid-single digits. I think that's generally what we've been saying and what, I think, our business units have inherently, indirectly reflected in their estimates. Which, of course, is the basis for our estimates at this point.

Okay, sounds good. So, if I look at the organic growth forecast, I guess you said it's going to be roughly split evenly between the two segments, how do we think about that? Are you going to get some pricing power in Fiscal '13? I would think that would be a tail wind for you guys.

Again, inherent in our estimates we have both organic unit quantity and selling price. Historically, and we've spoken about this that typically we don't expect and see a significant contribution to revenue and bottom line in terms of selling price adjustments as we focus on market penetration. And, Eric can speak more about that strategy. But, there's inherent in our 5% to 7% growth there is not, at this point, a large contributor of pricing in that number.

Right. We've had, this is Eric, we historically have really moderated our price increases. I do think that there is an opportunity to pass along some cost increases. So, maybe we'll see a little bit more of that in the future. But, our -- traditionally, our sales growth comes from unit volume. We've got a tremendous amount of goodwill from our customers. And, we really enjoy that goodwill and it helps us acquire other businesses that they want us to own and helps us to pick up market share. So, we haven't pushed that lever or pulled that lever as some other companies have. But, I do think that there's more of an opportunity to do so as we go forward.

Okay, great. Thanks for that color and then just going back to specialty products, I was curious if you could maybe talk a little bit about how big that is today? And, basically, where did it come from?

Our specialty product, actually we've had these businesses for over a decade. And, we were very successful in taking basically aerospace technology and transferring them over to non-aerospace markets. So, over the last -- in particular, over the last five years the EPA has changed the rules and has reduced the amount, the level of unburned hydrocarbons, that can be dumped into the atmosphere. So, as a result the only way to get rid of these unburned hydrocarbons is to, by definition, burn them. And, when you burn them you create a lot of heat and that heat damages the electronic or metal or composite components around it. So, we've developed some solutions in our specialty products group, which are really an off shoot from the aerospace business, where we are able to satisfy that market and permit these industrial products to operate at much higher temperatures than they've operated at in the past.

So, it's really an extension of businesses that we've owned for over a decade. And, we saw the opportunity out there and we just went out after it. And, I think there continues to be very good opportunity in those segments. Of course, in 2011, in particular at the end of 2011, there was a lot of investment, and that has now slowed down in 2012, so we have the negative comparison. But, we do anticipate that to turnaround really in the second half of next year. But, again, it is an off shoot and it's related to what we're doing on the aerospace side.

And, Tyler, just in terms of rough order of magnitude, it's, round numbers, runs typically about 10% of sales in terms of that specialty product sales. And, as Eric said, it started out exclusively commercial and we've grown into the industrial. And, it moves around, but it's round numbers 50% and 50%, and of course the 50% industrial is reported in our, what we report as other industries. And then, the 50% commercial would be part of what we report in terms of our commercial aviation markets.

Okay, got you. And then, just a little bit of a clarification. You said the pick up expected in the second half of Fiscal '13, would you expect the volumes to be roughly flat with where they were in Q4 in the first half?

Yes, Tyler, this is Tom again, we don't give quarterly earnings or revenue guidance, we stick to our full year outlook. And so, we don't get into the granular on that end. But, as both Eric and Victor mentioned, I think based on what we've seen, November and December to date, the opportunity for upside is more on the back half of the year than certainly the first quarter. So, other than that general statement, we don't provide specific commentary by quarter.

And, also, just to add, these parts that we manufacture over in that area are typically protected, the manufacturing processes are patent protected. And, we're fairly confident that we were -- I should say extremely confident that we will get the orders when the customers need the parts. It's just a matter that they need a little bit of a pick up in demand. There's been some, again, continual tightening of the EPA regulations about the amount of unburned hydrocarbons that can be dumped out there, and as the EPA regulations get tougher year after year, our customers must redesign their products. So, sometimes there's a little bit of delay, sometimes they have to raise their prices to their end customers and there can be a little lag. But, again, since our manufacturing processes are, many of which are patented, we're very confident we will see the demand as soon as the customer needs the parts.

Tyler, a little more color. I think that this particular business is a classic example of how technology that's developed in space and aerospace is then transferred to general industry. We've seen this time and again, as you know, whether it's for small components and electrical components, computers and so forth, solid state things. So, this is, I think, a great example of that.

And, it's the result of having developed this in the aerospace side, it was a natural to go into the industrial side where there was tremendous demand for that particular product. And, as Eric said, with some of our patented processes and techniques, this was just a natural for us. We actually set up another facility, another factory, to handle the industrial because it was so big that we couldn't handle it from our other facility. So, its been very successful.

Yes, it certainly looks like it. Great, thanks for that color. And, just lastly for me, how did you shake out on the PMA and DER development side? Did that track as you thought it would in Fiscal '13? And, I guess with R&D flat you'd expect that to be flat in Fiscal '13. Is that accurate?

Yes, we met our numbers and its been consistent with the past years in terms of numbers of PMAs, in terms of revenue potential of those PMAs. So, we continue to be very successful in that area. We also continue, now, to -- we're moving into more aircraft components and other non-engine products for the airlines and those have been very well received, and we're moving into technologies where people haven't seen Heico's participation in the past. And, that's been extremely well received.

Great. Thanks so much guys.

Thank you.

Ken Herbert, Imperial Capital.

Hello, good morning, everybody.

Good morning, Ken.

Eric, just first wanted to ask you, if I remember well, I think you were seeing through much of 2012 better growth within the repair business as compared to the parts business, slightly. I just wanted to see if you saw that continue into the fourth quarter? And then, as you look into 2013, as we look at the 4% organic -- or not 4% organic but the 5% to 7%, call it all-in growth for Flight Support, FSG, are you seeing better growth still on the repair side or relative to the parts side? And, how does that look?

Ken, I'm sorry can you just repeat that last phrase? We had a little technical problem here.

Yes, so, in Fiscal '13, are you expecting to see better growth on the parts business when you think about distribution and the traditional PMA parts? Or better growth, perhaps, on the repair side?

I would say we're seeing it consistent across the two. There are opportunities in both areas and I wouldn't say that one is materially different than the other.

Okay, so it sounds like the parts growth is maybe -- it's true that in '12, repair -- I think, you were saying you saw better growth on the repair business, correct?

In some -- this is Tom Irwin, sorry. In certain of the quarters, the answer is yes. I think for the full year the growth was in both parts and aftermarket repairs and roughly comparable.

Okay, that's helpful, thank you, and then, again, just one more on FSG. The two recent acquisitions, Action and CSI, I mean both on the repair side. Can you just talk a little bit about, Eric, as you look at future -- to drill down within opportunities within that business? And I know you're going to be opportunistic. But, anything you can say about where you're seeing activity levels or opportunities, perhaps, within FSG when you think about acquisitions moving forward?

I would say we're seeing them all over, there's no one particular area. We're seeing them, in general, all of the business segments in which we operate. Really, the key for us is, I mean, not only to make the numbers work, but we really got to make sure that we have a cultural fit with these businesses. Our style is to buy businesses that are extremely well run, where there's a large emotional investment and commitment to the businesses. And, they really operate the way that we would operate if we were to be there on a day-to-day basis. And, I think that's perhaps the greatest, or one of the significant, challenges for us is really to find those fits.

But, also, when we find those companies, we're really the perfect acquirer for those folks because if they were to sell to a private equity firm, life could change substantially down the road as the business gets sold. And, if they sell to a larger corporate acquirer, typically there's a group of folks from the corporate office who come in and change how things are done. So, we really -- we bring great value to those folks who appreciate it. And, the trick is to find those businesses that mesh well with what we're doing. But, we're seeing opportunities, I would say, across the spectrum of areas that we're in within the Flight Support Group.

Okay, no, that's helpful. And, it obviously seems to have been working very well for you, so I appreciate that. If I could, just one final question on ETG. Clearly, it sounds like Switchcraft and 3D Plus have turned a corner and are performing. Would you say that there's additional opportunity from a margin standpoint with those businesses in '13 through actions you can take? Or is it really now they're at ETG levels and it's going to be primarily a volume story?

Tyler, a couple things just as an aside. Switchcraft, it's not that it's turned the corner. It was never a bad acquisition, it wasn't, I would say, underperforming at any point. We had, of course, these one-time inventory related intangible adjustments, and so on, that affected it in the first six months as we can see with acquisitions based on their inventory levels at the time we acquired it. But, it's not an operating issue. On 3D Plus the orders were lower and they rebounded, as you know.

I would say right now that we are, generally speaking, I would expect that margins improve with sales improvements, so we'll see what happens. I don't want to go out there and predict that at this point. I think there's opportunity for it but I'd rather wait and see exactly what happens before promising anything.

Okay, thanks, Victor, that's helpful. Thank you, very much.

You're welcome.

Ron Epstein, Bank of America.

Hello, good morning. It's actually Elizabeth in for Rob today.

Okay, good morning.

Good morning. I just had a couple follow-on questions from some stuff that was discussed earlier. First of all, I thought in your press release that you said that margins for both ETG and FSG would be the same as 2012, but it sounds like margins in ETG are actually going to be down 200 basis points, is that right?

Well, the reference in the press release and the conference earlier was that the margins in ETG would approximate the full year 2012. I think the reference that I made, the 200 basis points, is in the second half of '12 it ran higher than that, about mid-20%. So, in fact that was the commentary in our third quarter call that we expected ETG margins to be about 25% or mid-20%s. And so, the commentary was on the full year average 23%. So, that's the mathematics.

Okay, got it. And then, just one quick other follow-up question. So, it's also in your release, you say you're expecting 5% to 7% net income growth in 2013, but then you also say that you're expecting an average of 20% potentially over the next year. So, is that difference of 13% possibly in the next year all through acquisitions?

I think what we're referencing is that we continue our near term growth goals, as Larry has often mentioned, the 20% earnings growth and strength in cash flow. And, the 20% reference is over a longer period than just short-term Fiscal 2013 estimates that we've introduced. So, I think that's the difference referring to a one to three year period as opposed to just Fiscal 2013 estimates.

One of the problems we have is that with all of the uncertainty out there, it's very, very hard to predict at this early stage in our Fiscal '13, what '13 is going to look like from an organic point of view. And, we've talked about, some people have asked about the second half, will sales pick up in the second half and all these other things. And, we just don't know where it will hit. We feel pretty confident that over a one to three year period we can hit the targets that we normally do. But, we don't know we have this uncertainty will take us, particularly in the first half of '13 and maybe in the latter half. For example, one thing that we talk about very often in our conferences, when we have conferences in New York and Boston and meet with investors, is the fact that the aerospace cycle, the overhaul and repair cycle, is not the same as the SEC reporting cycle, or the financial industry reporting cycle of one year. We tend to measure income and expense in a 12 month period and that's required for SEC reporting purposes. But, the aerospace industry, the overhaul and repair cycle runs somewhere between, we think, say two to three years.

So, in order to measure it accurately, people ask me, they say, well when are we going to see a big upswing in repair and maintenance activity and part sales and so forth, and the truth is we don't know. Some people venture a guess. We're not sure what it is. But, we do know if it doesn't happen in early '13, as we move into the latter part of '13 we become more certain that it will happen. And, this is the example in '08 and '09 and early in '10, the industry was weak and then in '11 there was a boom so Heico Aerospace organic was up over 20%, and for the year 2011 our growth was 32% or 33%. Well, in 2012, it came back down again, and that, in my opinion, reflects the overhaul repair MRO cycle. If you take '11 and '12 and add them up and divide by two, you get a pretty good growth rate. And so, when Tom says we're saying for the next one to three years we feel very comfortable with that. But, to target it to exactly one year, 2013 or the first six months, we don't know. I'm trying to give you the color that we use that we build into our own guidance and estimates. I don't know if that's helpful or more confusing.

And, just as additional, the 20% growth goals, which again have been our long term goals, they do include the additional acquisition opportunities that we would expect in the normal course of business over the next one to three years to execute on. So, again the 20% growth goal would include both organic and future potential acquisitions, which in some cases haven't yet even been identified.

Okay, all right, thank you.

Let me, one other thing, comment, just adding on what Tom said. Historically, we've made a number of acquisitions. Last year we made four or five. The guidance includes zero. I would say, based on history, that that's a very unlikely scenario. It could happen. Things could be such that we couldn't make any. But, I think that would be quite unusual. So, therefore, when we talk about 5% to 7%, it's what we consider baseline. And, if we make acquisitions, and we normally make accretive acquisitions, I would expect that would go up. Hello? Hello?

I'm sorry, are you ready for your next question?

Yes, okay. You had gone and I didn't hear anything. I thought there was some disconnect here. Are we all online now?

Yes, you're still online, sir.

Thank you. And, by the way, did the listeners hear my last comment?

Yes, sir.

Okay. Thank you.

Michael Ciarmoli, KeyBanc Capital Markets.

Hello, good morning guys. Thanks for taking my questions, most have been asked, just one, maybe for Eric. When you look at your existing product line in the Flight Support Group, there's obviously -- there continues to be a lot of pressure on aircraft retirements. We're seeing the older fleet retired. We're seeing maybe some of that pressure centered around the CF6, Boeing 747, 767, A330s. Are you guys seeing any impact in terms of product sales related to those platforms or any of the other retirements that are taking place?

Yes, we don't typically comment by product type or platform. But, yes, I can tell you we've seen some weakness in those segments. Not -- partly some of them have been retired but also perhaps a lot of that maintenance was really performed in the end of 2010 and 2011. So, maybe there's just a period of time where there's just not as much demand for that stuff. But, most of those aircraft continue to fly and we would anticipate future spending on them.

But, yes, in the short-term, definitely the wide-body market has been the source of greater weakness than the other markets. If you look at -- I think Pratt's latest report was that their engine spares sales were down an organic 25%. We're not seeing anything like that whatsoever. But, definitely, it's more of that wide-body market that's seeing some weakness.

Got you, fair enough. Thanks guys, that was my only one.

Thanks.

Thank you, Michael.

Julie Yates Stewart, Credit Suisse.

Just a quick housekeeping item for you, Tom, just what's the expectations embedded in the FY '13 guidance on tax rate and then for SG&A?

With respect to the tax rate, I think as I mentioned, our estimates include about a 35% full year effective tax rate for 2013. And, the other component that's a variable of that, or works in conjunction with that, is the non-controlling interest, or what used to be called minority interest. And, again, based on our estimates that number runs, is computed as a percent of pre-tax, about 12%.

As we spoke in the past, we often, in our modeling, combine the two because in some cases as the non-controlling interest rate goes down, taxes go up. So, on a combined basis, and as an example, in the fourth quarter it ran about 47% taxes and non-controlling interest as a percentage of pre-tax, and that's inherent in our estimates at this moment on 2013.

Julie?

I'm here.

Oh, okay.

And on SG&A?

In terms of SG&A, I'd say we -- our guidance is based on the operating margins of, again, about 18% consolidated. We don't give particular estimates in terms of SG&A or margins but rather, again, sales, NOI.

Okay, but, on a percentage of sales basis should it come down some assuming no more acquisitions or --?

Well, subject to the impact of other significant changes, whether it be acquisition or major changes in businesses, we wouldn't expect to see a huge change in SG&A as a percentage of sales. In terms of absolute dollars, obviously, they go up as sales increases. But, as a percentage of sales, not a dramatic change contemplated in our estimates.

Tom, I want to ask you a question. Maybe this will help, Julie. In the SG&A, do we disclose the percentage of intangible amortization that's in that SG&A?

Well, we -- no, we don't because it's split up in a couple of different places. But, what we do disclose, again, is the total amortization amount. Which, again, was about half -- we disclosed the total depreciation and amortization estimate, and about $35 million is the estimate for 2013. And, the split between depreciation and amortization is roughly 50/50.

Julie, one of the things I personally find a little confusing in looking at our own numbers is with that amortization, which again is a GAAP requirement and we show it. But, in running the company, we can't control that, that's not a controllable expense. So, we, in management, drop that out. That pushes the SG&A percentage higher. But, on a cash flow basis, which we managed the company, it doesn't impact it. So, our SG&A to us is really lower. If you follow what I'm saying.

I've got it. Thank you, very much.

Okay, Julie, thanks a lot.

At this time there are no further questions. I'd like to turn the floor back over to management for any closing remarks.

Thank you, and I thank all of you who are on this call this morning for your interest in Heico and we remain available to you at any time. You know where to reach us by telephone and e-mail. If we can answer any of your questions, please let us know. You're all invited, actually, to make appointments to visit our facility, particularly one in South Florida, at any time, set up an appointment, call Tom or Carlos, and we will show you the facilities.

And, we wish you all a very, very happy and healthy holiday season. We look forward to speaking to you for the Q1 conference call which will be, I guess, the middle of February next year. So, all have a very good year-end holiday and we'll speak to you soon. That's all that we have now.

Thank you. This concludes today's Fiscal 2012 fourth quarter and full year-end results conference call. You may disconnect and have a great day.