HEICO Corp (HEI) 2017 Q3 法說會逐字稿

Good morning. My name is Hope, and I will be your conference operator today. At this time, I would like to welcome everyone to the HEICO Corporation Fiscal 2017 Third Quarter Earnings Conference Call. (Operator Instructions)

Certain statements in today's 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: Lower demand for commercial air travel or airline fleet changes or airline purchasing decisions which could cause lower demands for our goods and services; product specification, cost and requirements which could cause an increase to our cost to complete contracts; governmental and regulatory demand; export policies and restrictions; reductions in defense, space or homeland security spending by U.S. and/or foreign customers; or competition from existing and new competitors which could reduce our sales; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties which could increase our product development cost and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk, interest, foreign currency exchange and income tax rate; economic conditions within and outside of the aviation, defense, space, medical, telecommunications and electronics industry which could negatively impact our cost and revenues; and defense budget cuts which could reduce our defense-related revenue.

Those listening to or reading this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including, but not limited to, filings on Form 10-K, Form 10-Q and Form 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, except to the extent required by applicable law.

Thank you. I would now like to turn the call over to Mr. Laurans Mendelson, HEICO's Chairman and Chief Executive Officer. 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 HEICO's Third Quarter Fiscal '17 Earnings Announcement Telecon.

I'm Larry Mendelson. I'm 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; and Carlos Macau, our Executive Vice President and CFO.

Now before reviewing our third quarter operating results in detail, I'd like to take a moment to thank HEICO's team members who again came through for all of us. This dedicated, diligent and creative group is responsible for the results. And they are committed to excellence. It is hard to sufficiently emphasize how fortunate we are to have each HEICO team member. I and other managers on the call are truly grateful.

So now I'll take a few minutes to summarize the quarterly highlights. Our consolidated third quarter net sales and net income represent record quarterly results, driven principally by strong net sales and operating income within both operating segments.

Consolidated net income increased 9% to a record $45.7 million or $0.53 per diluted share in the third quarter of fiscal '17. And that was up from $42 million or $0.49 per diluted share in the third quarter of fiscal '16.

Consolidated net income increased 18% to a record $132.3 million or $1.53 per diluted share in the first 9 months of fiscal '17. And that, too, was up from $111.9 million or $1.32 per diluted share in the first 9 months of fiscal '16.

Our Flight Support Group set quarterly net sales and operating income records in the third quarter of fiscal '17 by improving 16% and 11%, respectively, over the third quarter of fiscal '16. The increases principally reflect increased demand within the Flight Support Group's aftermarket replacement parts and repair and overhaul parts and services product lines, which grew organically by approximately 11% in the aggregate.

Cash flow provided by operating activities remained robust, totaling $179.3 million or 136% of net income in the first 9 months of fiscal '17, and that was up from $172.4 million in the first 9 months of fiscal '16. Cash flow provided by operating activities increased 17% to $81.6 million in the third quarter

(technical difficulty)

to approximate 150% of consolidated income.

I'd like to mention that many investors who we meet with continually throughout the year mentioned 2 things to us as management. One, that the multiple of HEICO's share price to our reported earnings, GAAP earnings per share is quite high. Right now, we're selling in the area of 40x earnings. That is a very high multiple. However, the investors that speak to me mentioned that they look at HEICO on a cash flow basis. And since we do 150% of reported income in cash flow, the multiple, if you take 150% of our earnings per share, is -- the actual multiple of our share price to cash flow is somewheres around 25x or 26x. So many investors do invest in HEICO because of its very significant cash flow.

As of July 31, '17, the company's total debt-to-shareholders' equity ratio was 36.3%, and our net debt-to-shareholders' equity ratio was 32.2% as of July 31, with net debt of $385.3 million. And that was principally incurred to fund acquisitions in fiscal '16 and '17.

Our net debt-to-EBITDA ratio was a very low 1.08x as of July 31. And even with our pending acquisition of AeroAntenna, our leverage ratio is projected to be less than 1.8x, probably closer to 1.77x at closing. As I've stated before, it's our practice of acquiring high-quality and high-margin businesses which enables HEICO to execute its strategy of growth with relatively low leverage.

In May '17, HEICO was selected by the airlines of Latin America and the Caribbean to receive the 2016-17 Top Supplier recognition. HEICO was ranked #1 out of over 200 suppliers evaluated. This recognition is presented to industry suppliers that have demonstrated their dedication to the highest standards in categories such as customer support, documentation, turnaround times and quality service. Being recognized as top supplier by the airlines themselves is a great honor, and HEICO is delighted to receive this prestigious recognition.

In June '17, our Flight Support Group acquired Carbon by Design, a rapidly growing manufacturer of composite components for UAVs, rockets, spacecraft and other specialized applications, serving the commercial aviation and defense industries. Carbon by Design continues HEICO's expansion in proprietary composite solutions for extremely demanding technical requirements. In addition, we expect this acquisition to be accretive to our earnings within the first year following the acquisition.

In 2017, Emmanuel Macron, President of the Republic of France, named me, Laurans Mendelson, a Chevalier in the French Legion of Honor. I was deeply humbled by this great honor bestowed upon me in recognition of my contribution to French-American friendship and cooperation. HEICO Corporation has maintained important operations in France for many years through our Buc, France-based 3D-Plus subsidiary and more recently through our L’Isle Jourdain, France Air Cost Control subsidiary. Both businesses continued to successfully expand their operations in both France and the United States, and we plan to continue our international expansion and our corporate footprint abroad.

In July '17, we paid an increased regular semiannual cash dividend of $0.08 per share. This represented our 78th consecutive semiannual cash dividend since 1979 and an 11% increase over the prior semiannual per share amount of $0.072. Of course, that's adjusted for the company's 5-for-4 stock split, which was distributed in April '17. In addition, we increased our cash dividend by 13% in December '16.

Recently, we entered into an agreement to acquire AeroAntenna, which will represent the largest purchase in HEICO's history. Closing, which is subject to government approval and standard closing conditions, is expected to occur during the fourth quarter of fiscal '17. AeroAntenna designs and produces high-performance active antenna systems for commercial aircraft, precision-guided munitions and other defense applications and commercial uses. AeroAntenna will be part of our Electronic Technologies Group, and we expect the acquisition to be accretive to our earnings per share within the first 12 months following closing. In addition, we plan to fund our pending acquisition of AeroAntenna through our existing credit facility and available cash.

This week, we announced that our IRC camera subsidiary supplied a specially designed infrared imaging camera which was incorporated into an airborne infrared spectrometer used to observe and obtain measurements of this total solar eclipse visible throughout much of the United States on Monday. My personal congratulations are extended to our very, very talented project team for another successful high-tech endeavor.

I would now like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, and he will discuss the results of the Flight Support Group.

Thank you very much. The Flight Support Group's net sales increased 16% to a record $258 million in the third quarter of fiscal '17, up from $222.6 million in the third quarter of fiscal '16. The Flight Support Group's net sales increased 10% to a record $710.7 million in the first 9 months of fiscal '17, up from $647.4 million in the first 9 months of fiscal '16.

The increase in the third quarter and the first 9 months of fiscal '17 reflects organic growth of 6% in both periods and the impact of our recent profitable acquisition. The organic growth in the third quarter and first 9 months of fiscal '17 is principally attributed to increased demand in new product offerings within our aftermarket replacement parts and repair and overhaul parts and service product lines.

These increases were partially offset by lower demand within our specialty products product lines for certain commercial aerospace and defense products in the third quarter of fiscal '17 and for certain industrial and defense products in the first 9 months of fiscal '17.

Excluding these factors, which included a push to the right for defense projects, coupled with a softening in demand for wide-body commercial components supplied by the specialty products group, the Flight Support Group experienced organic growth of 11% and 10% in the third quarter and first 9 months of fiscal '17, respectively.

The Flight Support Group's operating income increased 11% to a record $46.7 million in the third quarter of fiscal '17, up from $42 million in the third quarter of fiscal '16. The Flight Support Group's operating income increased 12% to $132.8 million in the first 9 months of fiscal '17, up from $118.8 million in the first 9 months of fiscal '16. The increase in the third quarter and first 9 months of fiscal '17 principally reflects the previously mentioned net sales growth. Additionally, the first 9 months of fiscal '17 reflects efficiencies realized from the benefit of our net sales growth on a relatively consistent period-over-period SG&A expenses.

The Flight Support Group's operating margin was 18.1% and 18.9% in the third quarter of fiscal '17 and '16, respectively. The Flight Support Group's operating margin increased to 18.7% in the first 9 months of fiscal '17, up from 18.3% in the first 9 months of fiscal '16. The decrease in third quarter of fiscal '17 principally reflects an increase in intangible asset amortization and depreciation expense associated with our profitable fiscal '17 acquisitions as well as the impact from changes in the estimated fair value of accrued contingent consideration, principally due to foreign currency valuation adjustments associated with the prior year acquisition. The increase in the operating margin of the first 9 months of fiscal '17 is mainly attributed to the impact from the previously mentioned SG&A efficiencies.

With respect to the remainder of fiscal '17, we now estimate high single-digit growth in the Flight Support Group's net sales over fiscal '16 levels, and the full year Flight Support Group operating margin to approximately 19%. Further, we continue to estimate that approximately half of our fiscal '17 net sales growth will be generated organically.

Now I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the results of the Electronic Technologies Group.

Thank you, Eric. The Electronic Technologies Group's net sales increased 1% to $137.9 million in the third quarter of fiscal '17, up from $136.2 million in the third quarter of fiscal '16. The Electronic Technologies Group's net sales increased 9% to a record $405.2 million in the first 9 months of fiscal '17, up from $372.9 million in the first 9 months of fiscal '16.

The increase in the third quarter and first 9 months of fiscal '17 reflects increased demand for our aerospace, space, other electronics and medical products, partially offset by a decrease in defense-related net sales, principally due to customer delays in getting some anticipated new orders under contract, which delay started to reverse toward the end of the quarter. Additionally, the increase in the first 9 months of fiscal '17 reflects organic growth of 4% as well as a contribution from our profitable fiscal '16 acquisition. The aforementioned delays were a push to the right, if you will, of certain defense contracts, which we anticipate will benefit future periods starting sometime in the fourth quarter and building into our fiscal 2018.

For those of you who have known HEICO for a while, you will recall that these kinds of shifts are not historically unusual, and we frequently mention that our Electronic Technologies Group's net sales and earnings may be lumpy from quarter-to-quarter for a variety of reasons. It's why we focus on annual performance and maximizing profitability instead of revenue-timed, and I expect that this will continue to be the case going forward.

The Electronic Technologies Group's operating income increased 15% to $38.5 million in the third quarter of fiscal '17, up from $33.6 million in the third quarter of fiscal '16. The Electronic Technology Group's operating income increased 19% to a record $106.5 million in the first 9 months of fiscal '17, up from $89.3 million in the first 9 months of fiscal '16.

The increase in the third quarter of fiscal '17 principally reflects a favorable gross margin impact from increased net sales as well as lower legal expenses and a more favorable product mix for certain of our space, other electronics, aerospace and medical products, partially offset by a decrease in net sales and less favorable product mix for certain of our defense products.

The increase in the first 9 months of fiscal '17 principally reflects the previously mentioned net sales growth and the decrease in acquisition cost associated with the prior year acquisition as well as the previously mentioned decrease in legal expenses. Additionally, the increase reflects a favorable gross margin impact from increased net sales and a more favorable product mix from our aerospace, other electronics and medical products, partially offset by a decrease in sales for certain defense products and a less favorable product mix for certain space products.

The Electronic Technologies Group's operating margin improved to 28% in the third quarter of fiscal '17, up from 24.7% in the third quarter of fiscal '16. The Electronic Technology Group's operating margin improved to 26.3% in the first 9 months of fiscal '17, up from 23.9% in the first 9 months of fiscal '16. The increase in the third quarter and first 9 months of fiscal '17 principally reflects the previously mentioned improved gross profit margin and decreases -- decrease in legal expenses. Additionally, the first 9 months of fiscal '17 reflects the previously mentioned decrease in acquisition cost.

With respect to the remainder of fiscal '17, we now estimate high single-digit growth in the Electronic Technologies Group's net sales over fiscal '16 and anticipate the full year Electronic Technologies Group's operating margin to approximate 26%. Further, we continue to estimate that approximately half of our fiscal '17 net sales growth will be generated organically. These estimates include our pending acquisition of AeroAntenna from estimated closing, whenever that occurs, through the end of our fiscal year at October 31, 2017, but exclude any other additional potential acquired businesses.

Now I would turn the conversation back over to Larry Mendelson.

Thank you, Victor and Eric. Moving on to earnings per share. Consolidated net income per diluted share increased 8% to $0.53 in the third quarter of fiscal '17, up from $0.49 in the third quarter of fiscal '16, and increased 16% to $1.53 in the first 9 months of fiscal '17, and that was up from $1.32 in the first 9 of fiscal '16. Of course, all fiscal '16 diluted earnings per share amounts have been adjusted retrospectively for the 5-for-4 stock split which was distributed in April '17.

Depreciation and amortization expense totaled $16.4 million in the third quarter of fiscal '17, up from $15.4 million in the third quarter of fiscal '16 and totaled $46.9 million in the first 9 months of fiscal '17. And that was up from $44.6 million in the first 9 months of fiscal '16.

The increase in the third quarter of fiscal '17 principally reflects the incremental impact of higher amortization expense of intangible assets and depreciation expense attributable to our fiscal '17 acquisitions. The increase in the first 9 months of '17 principally reflects the incremental impact of higher amortization, expense of intangible assets and depreciation expense attributable to the fiscal '17 and '16 acquisitions as well as higher depreciation expense associated with our continued investment in expanding the capability of Aeroworks, a fiscal '15 acquisition, in the Netherlands, Thailand and Laos.

R&D expense was $11.4 million in the third quarter of fiscal '17, and that compared to $12.7 million in the third quarter of fiscal '16, and it increased 4% to $33.9 million in the first 9 months of fiscal '17, which was up from $32.7 million in the first 9 months of fiscal '16. As usual, significant ongoing new product development efforts are continuing at both Flight Support and ETG as we continue to invest approximately 3% of each sales dollar in new product development.

Consolidated SG&A expense increased to $72.8 million in the third quarter of fiscal '17, and that was up from $63.7 million in the third quarter of fiscal '16 and increased to $197.5 million in the first 9 months of fiscal '17, up from $190.5 million in the first 9 months of fiscal '16.

The increase in third quarter of fiscal '17 principally reflects $6.6 million attributable to the fiscal '17 acquisitions and a $3.7 million impact from foreign currency transaction adjustments on borrowings denominated in euros under our revolving credit facility. And that was partially offset by the previously mentioned decrease in legal expense.

The increase in the first 9 months of fiscal '17 principally reflects $8.9 million attributable to fiscal '17 and '16 acquisitions, plus a $2 million impact from foreign currency transaction adjustments on borrowings denominated in euros under our revolving credit facility. And that was partially offset by $3.1 million of acquisition costs which were recorded in the first 9 months of fiscal '16, which was associated with a fiscal '16 acquisition, and the previously mentioned decrease in legal expense.

Consolidated SG&A expense as a percentage of net sales increased to 18.6% in the third quarter of fiscal '17. That was up from 17.9% in the third quarter of fiscal '16 and decreased to 17.9% in the first 9 months of fiscal '17, and it was down from 18.8% in the first 9 months of fiscal '16.

Increase in consolidated SG&A expense as a percentage of net sales in the third quarter of fiscal '17 principally reflects the impact of the previously mentioned foreign currency transaction adjustments, partially offset by the impact from the previously mentioned decrease in legal expense.

Decrease in consolidated SG&A expense as a percentage of net sales in the first 9 months of fiscal '17 principally reflects the impact of the previously mentioned decrease in acquisition cost and legal expense in addition to efficiencies realized from the benefit of our net sales growth on a relatively consistent period-over-period SG&A expense which was partially offset by the impact of previously mentioned foreign currency adjustments.

I hope you can all follow that because it's very confusing. I'm sure Carlos will add a little color. If you want to speak to him, he can go into some more detail. But it is rather confusing.

Interest expense was $2.4 million in the third quarter of fiscal '17 compared to $2.3 million in the third quarter of fiscal '16. And for the first 9 months '17, it was $6.4 million compared to $6.2 million in the first 9 months of fiscal '16.

Other income in the third quarter and 9 months of both years was not significant.

Our effective tax rate in the third quarter fiscal '17 decreased slightly to 30.3% from 30.5% in the third quarter of fiscal '16. The effective tax rate in the first 9 months of fiscal '17 decreased to 29.8% from 30.9% in the first 9 of fiscal '16.

The decrease in the first 9 of fiscal '17 principally reflects a discrete income tax benefit related to stock option exercises resulting from the adoption of the new accounting standard on share-based payment transactions in the first quarter of fiscal '17 and the favorable impact of higher tax-exempt unrealized gains in the cash surrender value of life insurance policies related to the HEICO Corporation Leadership Comp Plan. These decreases were partially offset by the benefit recognized in the first quarter of fiscal '16 from the retroactive and permanent extension of the U.S. Federal R&D tax credit that resulted in the recognition of additional income tax credits for qualified R&D activities related to the last 10 months of fiscal '15.

Net income attributable to noncontrolling interest increased to $5.8 million in the third quarter of fiscal '17, and that was up from $5 million in the third quarter of fiscal '16 and increased to $16.3 million in the first 9 months of fiscal '17. And that was up from $14.7 million in the first 9 of fiscal '16.

The increase in third quarter and first 9 months of fiscal '17 principally reflects higher net income of certain subsidiaries in FSG and ETG, in which noncontrolling interests are held.

For the full fiscal '17 year, we continue to estimate a combined effective tax rate and noncontrolling interest rate of between 39% to 40% of pretax income, and that assumes that the U.S. corporate tax reform does not become effective during this fiscal year.

Moving on to the balance sheet and cash flow. Our financial position and forecasted cash flow remain extremely strong. Previously discussed, cash flow provided by operations totaled a very robust $179.3 million in the first 9 of fiscal '17. And that represented, as I said before, 136% of net income. Cash flow provided by operating activities increased 17% to $81.6 million in the third quarter of fiscal '17, and that was up from $69.7 million in the third quarter of fiscal '16.

Working capital ratio improved to 2.9x as of July 31, and that was up slightly from 2.7 as of October 31, '16.

Our DSOs, days sales outstanding of receivables, is 49 days in both July 31, '16 and '17. Of course, we monitor very closely all receivable collection efforts in order to limit credit exposure. I may mention that we rarely have credit losses from receivables.

No one customer accounted for more than 10% of sales. Top 5 customers represented about 18% and 24% of sale -- consolidated net sales in the third quarter of fiscal '16 and '17.

Our inventory turnover rate increased to 135 days for the period ending July 31, '17. That compared to 124 days for the period ended July 31, '16. If we exclude the impact of our fiscal '17 and '16 acquisitions, the inventory turnover rate increased slightly to 125 days for the first 9 months of fiscal '17, which compared to 120 days for the first 9 months of fiscal '16. Much of the nonacquisition-related growth in inventory was directly attributable to our growth in backlog commitments which we intend to fulfill and ship in the near term. That's a very, very important thing to note.

As previously mentioned, our total debt-to-shareholders' equity was 36.3% as of July 31, '17. Our net debt-to-shareholders' equity was 32.2% July 31, '17, with net debt of $385.3 million, principally incurred to fund acquisitions in fiscal '17 and '16.

Our net debt-to-EBITDA ratio was a low 1.08x as of July 31, '17. In addition, after the pending acquisition of AeroAntenna, the largest acquisition in HEICO's history, we project our leverage ratio will be approximately 1.8x at -- technically, 1.77x at closing.

We have no significant debt maturities until fiscal '19. We plan to utilize our fiscal financial flexibility to continue to aggressively pursue high-quality acquisition opportunities which will accelerate growth and maximize shareholder returns.

Now for the outlook. As we look ahead to the remainder of fiscal '17, we anticipate net sales growth within the Flight Support and ETG group resulting from increased demand across the majority of our product lines, possibly moderated by short-term lower defense-related net sales, principally due to the order delays we discussed earlier. Also, we will continue our commitments to developing new products and services, further market penetration, aggressive acquisition strategy, and -- while at the same time, maintaining our financial strength and flexibility.

Based upon current economic visibility, we are increasing our estimated consolidated fiscal '17 year-over-year growth in net sales to 9% to 11% and net -- growth in net income to 14% to 16%, which -- both of which are up from prior growth estimates in net sales of 8% to 10% and net income of 12% to 14%.

Additionally, we continue to anticipate consolidated operating margin to approximate 20%, depreciation amortization expense to approximate $65 million, cash flow from operation to approximate $270 million. Further, we now anticipate CapEx to approximate $31 million.

These estimates include our pending acquisition of AeroAntenna from the estimated closing date through the end of our fiscal year, which is October 31, '17, but of course, exclude any other possible acquired businesses.

In closing, we will continue to focus on intermediate and long-term growth strategies with an emphasis on continuing to acquire profitable businesses at fair prices with strong margins.

That is the extent of our prepared comments, and I would like to open the floor for any questions. So thank you all very much.

(Operator Instructions) Your first question comes from the line of Larry Solow with CJS Securities.

Sounds like a very good quarter, good outlook. Maybe can you just discuss a little bit of the -- if there is a relationship between the little bit of a delay on the defense side and some push-out of deliveries and the rising backlog in inventories? Are those sort of intertwined? Or am I reading too much into that?

Well, I'll comment, and then I'm going to give it to Eric and Victor to give you more color. The -- as we've mentioned many times, the -- some of our defense businesses have large contracts, and getting them shipped and built can be lumpy. And in fact, I think our backlog is pretty good, it's pretty strong, and that's why you saw the rise in inventory. The rise in inventory is not something that escaped us and we got out of control. These people are buying product for manufacture and shipping and so forth. But as far as the detail of some of those things, perhaps Eric can give you a little color, Carlos can give you a little more color.

Yes. Larry, with regard to some of the defense projects, we know we're going to get the business. We've been told by the -- these various customers that we are going to get the business. But sometimes, these projects end up slipping to the right. Without commenting on specific programs, some of these are widely reported in the news media, so we're very confident that we're going to get them. Sometimes, we do have an impact in inventory as a result of the programs slipping to the right. But we're, again, extremely confident of our defense programs that we're on, and we're extremely confident that we're going to get the orders. And this is going to be terrific business for both HEICO as well as our customers. But that -- if that gives you a little bit of color.

Larry, this is Carlos. I may add that keep in mind that roughly $30 million of the inventory growth was acquired. So the real build is something in the mid-$20 million range. And that in and of itself is pretty consistent and in line with our sales growth. There's not one sub or anything like that, that sticks out other than ones that are really knocking the ball out of the park on sales, and that's to be expected. So nothing, from my perspective, in the inventory area that I'm worried about. We have very tight controls and governors of the inventory growth. And the things that we experienced this quarter or year-to-date were planned, and as Eric pointed out, in support of existing backlog.

Okay now, great. And Carlos, maybe while I got you, maybe a question for you just on the AAT acquisition. Can you just clarify sort of -- is the change in guidance and the outlook, I assume you are including some of AAT in there. And then the second question on that, without going into real specifics, could you maybe give us sort of a 50,000 look of just their margin profile relative to some of your subs in ETG? And sort of their capital requirements as compared to some of your companies?

So Larry, that acquisition, we've signed the deal and it's in regulatory review. So technically, we're under an NDA on that particular transaction as we're speaking to you, and so I don't want to divulge details. However, I will tell you that we have anticipated very little because we don't know when the close date will be, based on the regulatory reviews, the Federal Trade Commission reviews. So it hasn't -- it wasn't a material factor, if you would, in our consideration of the guidance ranges. That was purely a function of the (inaudible) that we're experiencing to date and the outlook that, really, our general managers down in the field have provided to us.

Your next question comes from the line of George Godfrey with CLK.

Wanted to ask about just following up AAT. And I heard on the nondisclosure agreement. But I just wanted to ask as it relates to the purchase price. You said that it falls within your typical range, and I believe that's 6 to 8x EBITA. And so that would suggest that the margin structure of this company and the sales per employee, which were also disclosed, are at or well above, perhaps, HEICO's general metrics. So my thinking is this is going to be a very nicely accretive acquisition. Is that right?

Yes. So let me answer that as best I can. The ETG has high margins, as you know. And generally speaking, we don't acquire things that are below 20% in operating margins. So we anticipate that this particular acquisition will be a very nice one for HEICO. We're looking more towards fiscal '18 because you have to remember, we're 2.5 months into our fourth quarter, we don't know when we get clearance. And then usually in the first couple months, George, of an acquisition, you got a lot of purchase accounting mumbo-jumbo that goes in there. You've got inventory writeups that you have to deal with and you have the amortization slug and all that. So like I said earlier, we're not really anticipating in fiscal '17 for that to be a big driver. But we do think, as Larry mentioned earlier, that this will be a fantastic acquisition for HEICO. It will be accretive to our business. And this is one that we've had our eyes on for quite some time. Victor, Eric and Larry have spent a lot of time with the executive team at this particular subsidiary. It's been one that we have looked at for 8 months. I mean, we've been -- over 8 months, a year.

Over a year. This is well over a year that we've started looking at this.

So we studied this thing very carefully both from a cultural standpoint and from a fit standpoint. And I think our investors would be very pleased. If we're able to get the regulatory approval, which we fully anticipate in the fourth quarter, you'll be able to see in our 10-K the pro forma results and the information. You'll be able to derive whatever assumptions you choose to make from the data points.

Got it. And then just I heard the 11% organic growth within FSG, excluding some components, and the total was 6%. What did the -- what was excluded again to get to that 11%, please?

Yes. Excluded would be some of our -- well, would be our specialty products business, which saw a delay in receipt on some defense products and a certain softness in the sale of large commercial aircraft newbuild rates. So you're probably familiar that over the last couple of years, the build rates in the 777 and the A380, which require a lot of interior components, have slowed, and that hasn't been entirely made up with the 787 and A350. So that's been the -- those 2 items were the cause of it.

Just to -- George, we try to differentiate because a lot of investors are very interested in parts and so forth, which is a very important part of our business. And we think that, that organic growth has been particularly strong.

Yes, I mean, I might add to that. I'll emphasize that. I mean, that aftermarket growth for HEICO was fantastic so far this year. And as you know, as we're said many times, were very customer-friendly on pricing. We're a value proposition to our customers. We believe they love us. And that growth is predominantly volume growth. And we believe that's industry-leading, so we're very proud of that.

Your next question comes from the line of Ken Herbert with Canaccord.

Congratulations on the AAT acquisition. I know it hasn't closed yet, but looks like it could be fairly transformational. I did just want to start, though, on the comment you just made, specifically within the FSG segment, the 11% organic growth, excluding the wide-body OE build and some of the defense products. Eric, can you just drill down a little bit on that? And maybe provide any commentary on what you're seeing, either geographically or perhaps on a parts versus repair and overhaul basis? And I know obviously, we're 2 or 3 quarters past calling out Latin America, the specific headwinds, which sounds like that's maybe turned the corner. And I know repair and overhaul in some markets has maybe been a little softer. But any more detail on that 11% would be great.

Yes, Ken, that's a very good question. Actually, in the last couple of weeks, I've spent a lot of time with our sales and marketing folks over in the parts as well as the repair businesses. And I can tell you that they are very excited about all of the stuff that they're working on, between the different product lines, the adjacent spaces that we're going into, new customers coming on board, customers really picking up the pace of approvals and having enthusiasm in the stuff that we are working on, I'm really impressed with the stuff that they're doing. So again, as Carlos pointed out, that 11% is basically all volume. It's not price because we're extremely price-friendly. So you can only imagine that our customers, I mean, I think are really quite happy with our performance, our product offering, our pricing, everything that we've got to offer. Again, I don't want to make light of the competitive situation because our competitors don't give up market share easily. They don't let us go in and take additional market share without a response. Everything we do is a fight, whether it's finding the product, figuring out how to design it, manufacture it, get the customer to buy it. There is a tremendous amount of work that's involved in all of this. But I think it does speak to the -- really, our position in the market and the way the customers want to grow their product lines with us, both on -- as I said earlier in my answer, both in the traditional HEICO areas as well as going into some of the adjacent, what I call white spaces, where we haven't been in the past, but our technology is consistent with those products as well. And those are nice areas for us to be able to grow into.

That's helpful. Are you -- relative to other alternative non-OE material providers, Eric, do you think you're taking market share? Or how would you characterize the competitive [case]?

I think, yes. I think we're -- we are taking market share. But again, since we don't get price and since other competitors do drive big price, I think the

market share percentage is muted. But there's no question that, in my opinion, that we are -- we're taking share in, really, many different areas, and some of which are pretty difficult competitive environments.

That's helpful. And just one final question on AAT. I know, obviously, the deal hasn't closed. But as a follow-up to an earlier question, it sounds like the business is doing very well now, considering it's mixed and some of it's specific defense products and opportunities. As you think about that business over time, is it fair to think about that business as maybe mid- to high single-digit growth business? Or any quantification on, sort of across the cycle, the growth rate there for that business as we think about that from a modeling standpoint? That would be helpful.

Yes, Ken. I think -- this is Victor. The way we model these things tends to be fairly flat growth, low to mid-single digits maybe. And that's kind of what we count on typically when we make an ETG acquisition. Sometimes -- I mean, we try to assume it's going to be relatively flattish and then go from there. Typically, they grow, and you see our organic growth has been higher than that. But we'd rather put it there and see where it winds up as we get further out. Obviously, our objective is to see more growth. They have a lot of potential, a lot of great things that they're working on, so it's our desire to get there. But we're very conservative in our planning. And if we do better, which we've historically done, great. But if not, then we're not sending you out there or anybody else to be disappointed. But I will say they're working on some very exciting things. And the programs that they're on -- and I'm really not at liberty to detail those programs at this point, but the programs that they're on are growing programs, and some of them have enormous growth. So even without adding new product and winning new programs, I think they've got the potential. And that's just one of the things that we really liked about the business.

I'd just like to add a little more color, which you might find amusing, is that it all depends who you ask that question to. I happen to agree with Victor's comment and answer. But if you spoke to the broker who sold us the business, you would find that he thinks it's going to grow a lot more, but we normally discount a lot of that stuff. But in this case, we do think there's great opportunity for growth. We have -- it's an excellent management, brilliant scientific, technical management, really understand their product and what they do in-depth and very, very creative group. So I'd just second exactly what Victor said.

That's helpful. And if I could, Larry, just one quick follow-up on that. You bought, obviously, 100% of the business, and I know you've got a very attractive earn-out. But that is different than the just over 80% that you typically do. Was there strategically any reason for that difference? Or any potential concern around this management team and longevity?

No. The answer is no and that -- we buy both ways. Sometimes we buy 80.1%. Sometimes we buy 100%. So it just happened in doing this transaction that that's the way the chips fell. No, there was nothing very special about it. We think that this is a very good management, their pledge to stay there. And so no, we think a $20 million upside will keep his -- in structuring the deal, the -- buying 80% versus 100% in the accretion and so forth, if you do the arithmetic, we're much better off in giving him an earn-out of $20 million than buying 80%. It just works a lot better for HEICO.

Yes, and I'd would just add one thing. I would say the majority of our acquisitions have actually been 100% purchases, the super majority probably, even 100% purchases. But a number of that are announced, and then we've got the ones that have a minority interest to retain minority interest. But what we have found is the companies that we own 100% of either from day 1 or later, the founders sell us their minority interest, they're still around and they're still tied in and they love their businesses. And that's the key, I think, to what we do. If we were just relying on a financial tie-in, then I don't think we'd make the acquisition. It's really about a cultural issue. And they are wanting, what we call, a good home for their business and our cultural match between us where they just love doing what they do, are very committed to their people, to their customers, but want to have some sort of liquidity event or any variety of reasons, including estate planning, things like that. So while it's nice that we sometimes do that, it isn't a requirement. And I would expect that the mix of minority interest versus 100% acquisitions will continue to be roughly what it's been.

Your next question comes from the line of Drew Lipke with Stephens.

First question for Eric. You've always talked about adding 300 to 500 new replacement parts annually. And I think recently, that's been kind of running north of 500. And I'm curious, you mentioned the customer response recently and the favorable viewpoint that customers have of HEICO. What are the largest gating factors for you ramping that approval number to something higher to 500 or something just continue to grow that approval?

Well, again, it -- we say that it ranges because the number -- the way that you end up counting the parts, depending on how many sub-assemblies they've gotten, how many detailed parts, it can get, really, very confusing in the fleet. So that's why we provide the range. I think that we have got -- I know that we have the ability to increase that number if the market demands it. But again, we feel that the level of development that we've got now is optimal, both for HEICO and our customers. And so I would say that we would continue to produce in that area. I think the value of the products that we are obtaining approval on and the potential is improving, but that you won't necessarily see in the number of approvals. But I think the sales point, the potential sales per part is really doing very well. And our new product development groups are very confident and optimistic on what they've got in the, frankly, in the hopper for both the fiscal '17 as well as for fiscal '18. I mean, we have a, I would say, much higher percentage of our fiscal '18 new product development slots filled now, which is higher than it's been typically in prior years. And again, for competitive reasons, I don't really want to -- I can't speak about it any more than that, but I think it does speak to the level of interest at both the customers -- as well as our ability to develop the part as well as our ability to obtain FAA approval. So again, I think it's good numbers, but price per product is going up.

Okay. That's helpful. And then maybe if we could bifurcate between the PMA opportunity with engines and airframe and component opportunity. Because I think on the engine side, it's been somewhat more limited by both the OEMs and the lesser community. And for that reason, I think you focused recently more on airframe and more on component parts recently. And I'm curious if you think about the mix today for airframe versus engine, how does that look today versus maybe 5 or 10 years ago? And then as the airframe OEMs focus more and more on the aftermarket, how do you see this market opportunity evolving for you on the airframe side, if at all?

So that's a good question. When we came to the company 28 years ago, we were 100% engine, and it was basically a particular part, pretty much one part, for one type of engine. And then our customers asked us to develop more parts for that engine, and they asked us to develop more parts for other engines manufactured by that original equipment manufacturer and then asked us for more parts for other original equipment manufacturers' engines. And then I would say about 20 years ago, they started asking for component parts because, of course, the fuel, hydraulic, pneumatic, electromechanical, avionics, wheels and brakes, all those other stuff is also a tremendous market. So our original business was over in the engine area. You are correct that the engine manufacturers have become a lot more focused in that area. And frankly, what I would say from an airline perspective, they've become a lot more anti-competitive. And there have been news reports on various governmental bodies investigating the, frankly, the anti-competitiveness of the aircraft engine market. And I personally believe that there's tremendous validity in that. And in speaking to customers, the customers want our engine parts very badly, but there are certain practices that are, I would say, restrictive in the marketplace and preventing that market from growing at what the customers are demanding. So that is definitely having an impact over on the engine side. I think it's a shame. I think it's disgraceful, frankly, that our airline customers are extorted -- what I would say are extorted this way. And you can see I get very wound up and emotional over this because I'm aware of a lot of these practices. But time will tell, and we'll see what happens in that area. In the meantime, we've been extremely successful over in the non-engine area, and we continue to develop -- most of our parts are over in the non-engine area, and there's tremendous appetite for those parts. And I don't think, based on the market dynamics, that the manufacturers and our competitors will be -- will have the same results and be able to restrict the marketplace they have over on the engine side. And of course, the airlines are very much aware of this, and I think they don't want those kinds of practices proliferating in the market because it's just not fair. We compete every day on every single thing that we do. We don't have the products that we sell as PMA by definition. There's competition on every single thing we do. We go to bed every night knowing that we've got to be the best in terms of cost, quality and turn time with our customers. And we don't have the luxury of being able to increase prices 5% to 10% a year and dictate terms to our customers. We're trying to be very customer-friendly and build this market. So I think that the customers see that value, and they are not going to have the same competitive dynamic occur over in the non-engine area.

Your next question comes from the line of Dr. Herbert Wertheim with Brain Power Inc.

It was interesting that you mentioned that 28 years ago is when we got involved with HEICO with our single-engine part and what you've been able to achieve in these really quite few years. I want to congratulate all 3 of you and your team. As a result of that, as you know, I'm your largest single shareholder. So many, many millions of shares, and we are excited to maintain that relationship. Very much -- yes, go ahead, please.

No, no, go ahead. I thought you'd -- go ahead.

I was going to say as a result of what you have been able to achieve over these years, it has enabled us to give away almost $200 million in charitable donations through our foundation and our own self personally. So we would like to thank you on behalf of all of those organizations, whether it's the college of engineering, the University of Florida or the medical school at FIU or the nursing school or many of the other things that we have done. We've built public radio stations, television stations as a result of the good fortunes that you have provided us. So we thank you for doing those things. It's been a wonderful relationship. As you know, I have been one of your greatest cheerleaders. And I applaud what you've been able to do for you and your sons.

Well, Herb, it's very hard for me to respond to something so complimentary, and we appreciate your involvement and your support over the many years and the confidence that you had basically from the first time you visited the facility and understood what HEICO was doing and how we were going about it. You are a great investor. You've been an extremely successful investor your whole life. You're a brilliant scientist yourself. We know that. I know that. And I've known you for over 40 years. And we're very, very happy that this program worked out so well. We also salute you for being so charitable in the Miami community and giving to hospitals, universities and other charitable organizations, which you are a very, very charitable family and a great asset to our community. So we will continue to try to live up to the standards that you have mentioned. And we, again, thank you so much for being part of the team that roots for the success of HEICO. And that's about it all I can say. Maybe Eric wants to add some.

Yes, Herb, this is Eric. Also, I remember you visiting with us up in Hollywood about, I don't know, 27 years or so ago and sitting in my dad's office and looking at the JT8D combustor. And you were one of the few people who saw the opportunity in creating a competitive marketplace, and you've been a great friend and supporter along the way, cheerleader. And we just greatly appreciate your friendship and support over many, many decades, so thank you.

Herb, this is Victor. I just want to echo what Eric said and say thank you for your many, many years of friendship and the many -- hopefully, many years to come.

Thank you, guys, for those kind words.

Okay. Well, thanks, Herb. Do you have any other questions that you'd like to ask?

Well, I had a question about the relationship with Lufthansa. Is that still as reported before? Or those are not making -- or the engine parts are not as predominant in the growth of HEICO? What has happened with that relationship where they at one time had 20%?

Herb, that's a good question. This is Eric. They continue to hold 20% of much of our PMA and repair business. As you pointed out, HEICO has grown in other areas, and those other areas are not as strategic for them. And while they've acknowledged that terrific investment opportunity, they really have to further board mandate. They have to invest their dollars in businesses that are strategically related to their core airline business. But they continue to be a great customer, a great partner. They, I believe, have seen some of the pressures that certain engine manufacturers have exerted. I don't believe that they're happy about those pressures. And they and HEICO are very much on the same page as to how they would like the industry to go. So the relationship remains very strong. Again, we don't tend to comment on customer's specific product lines for competitive reasons. So that's probably why you haven't heard their name as much recently.

Herb, one other comment. Wolfgang Mayrhuber is still on the HEICO board, very knowledgeable in -- of course, in the airline industry, and we have a very strong close relationship. So I would say that the relationship with Lufthansa is still quite strong.

Well, Larry, what would happen if they decide they want to give up their 20% interest in that part of HEICO? Are we prepared to purchase that? Or how would that be taken care of?

The answer is that hasn't been discussed, but whatever they want to do. I don't think that -- when this deal was first cut in 20 years ago, HEICO was much smaller, and it was almost totally a footprint in the parts business. And so HEICO has expanded. And so just by HEICO's own growth, the significance of the Lufthansa relationship has decreased over the years. It's still an important relationship. We have great relationship. We have meetings and so forth. But its impact on HEICO over the last 5 or 10 years has diminished significantly. And HEICO has broadened its footprint all over the world, all over different products and so forth. So in today's world, as you well know, HEICO is a much, much more diversified company, much stronger company financially, has contacts with virtually all of the major airlines and some of the minor ones throughout the world. So the significance of the Lufthansa relationship or investment, put it the investment not the relationship, is not as significant as it once was.

Okay. I had another question, which had to do with the engine parts, the mixed engine parts. As -- if you had a GE or a Pratt & Whitney engine or a Rolls-Royce, and on the majority of the parts are theirs and we -- I'd say whoever rebuilds that engine puts one of our parts in there, will that negate their guarantees or their relationship? Or what happens in that situation? It's something that's been on my mind for quite a while, because, obviously, not all the parts are going to be HEICO parts, but many of them may be. So what happens in those situations?

Herb, that's a great question. And simply, HEICO warrants its products and has a -- also insurance back-up to that, and the OEMs warrant their product. And if there is an incident, then there is an airline-sponsored failure investigation, and HEICO has participated in those failure investigations repeatedly. I mean, we've been involved in many, many, many of them. And fortunately, never has a HEICO product been found to have caused any of those failures. We've shipped, I don't know, 65 million parts in the last roughly 20 years or so and not a single inflight shutdown or service fault that has resulted as a result of HEICO part. So we warrant our products. The OEMs warrant their products, and that's how that works. I think one of the things the airlines are upset about is sometimes certain manufacturers can threaten illegally and improperly that in the event anything other than their own part is installed and there is a problem, that they will not warrant their parts. And that's just not permitted legally. Customers are very upset about that, and I think that's why various reviews are going on right now. So we're confident with the position that we've got and the ability to support our products.

Herb, just a little more color to that. The question comes, do you think that 19 of the largest 20 airlines in the world would be using HEICO engine parts and other parts if that would cancel the warranty on their engines? And of course, the answer is no. The OEMs like to blow smoke and threaten and threaten, well, the warranty and so forth. But as Eric said, that's illegal. It's an empty threat, but they use it as a marketing tool. We're dealing with GE, Pratt. We don't compete much with Rolls-Royce. But GE and Pratt are very, very tough competitors in the market, and they are going to use every bit of strength that they can dream of in their marketing. So it's actually -- we don't like them to threaten that, but the big airlines really consider -- I believe most people consider that an empty threat.

Well, I had one other question for you, please. And about -- we're finding out there's more and more light jets being flown out by the airlines. And while those engines are being made by Honeywell or the smaller engines by Pratt or some of the other people, what's happening with HEICO in those smaller engines of these smaller airframes?

Herb, this is Eric. We have not been active in the engine side over in the bizjet market. We are active in the large commercial market and some of the regional jets. But some of these smaller Honeywell engines, we're not involved. We don't compete in that marketplace whatsoever.

And the reason for it is HEICO is a value proposition, as you know. And we are a very, very good alternative to an airline that has hundreds of engines where the value proposition is considered. Where you have fleets or individual bizjets and they fly 1 or 6, you don't have the value proposition that you have on the big fleets. And one of the reasons that our business -- when they are -- we're often asked what happens when 1 airline acquires or merges with another 1? Historically, what's happened is it's been better for our business because the value proposition to the new combined airline increases because they have more aircraft and more engines.

All right. American Airlines is flying more and more of these jets, of these other smaller passenger jets, 80, 90 passengers. That's why I asked that question. It seems like there's more and more of those types of airframes flying out than there has been in the past.

There are, and we do have a position on those aircraft, in particular, through our non-engine parts as well as our component overhaul and distribution businesses. So we are very much present on that and benefiting from that segment to the market.

Well, thank you very much for answering those few questions I had. And again, our family thank you for all the hard work here that you've done and also the community efforts that you and your family have done in the Miami area, it's been fantastic. Thank you.

Herb, thanks very much. Much appreciated.

Your next question comes from the line of Louis Raffetto with Deutsche Bank.

Eric, thank you for all the color earlier on the -- sort of the PMA market. And so I just had a couple questions about Flight Support. The margin that you're looking for, for the year still implies a pretty big tick-up, I guess, versus 3Q, you guys are going to 4Q. So how much of the sort of the lower margin 3Q was due to the FX impact versus the higher amortization -- depreciation, amortization, I guess?

Louis, Carlos is going to go over that information.

Well, Louis, in the third quarter, those [8 ticks] that we were down, roughly 0.5 of that, the majority of it, was due to amortization and depreciation associated with our recent acquisitions compared to the prior quarter. And then there was a small piece that he [tapered] to FX that was in related to a euro-denominated earn-out.

Okay, great. And then also Flight Support, the -- how much, I guess, for the -- in specialty products, when we think about the soft and the wide-body and then the defense pushed their right, the soft and the wide-body is probably not going to stop for a bit, and the defense has announced it will come back. So any idea about size there, I guess?

We feel very confident about our position there. But I think, yes, on the commercial side, there's going to be, if you look at the projections going forward, I think it's somewhat consistent with level of production. So I think we'll cycle off that in another couple of quarters. With regard to defense, hopefully, these orders come through sooner than later. The world, of course, is not getting any safer. So we're very confident on our, both the short-term as well as medium and long-term success in those markets.

You keep seeing 11% growth, that is PMA and MROs. Not too much of a worry realistically.

Yes. Although I -- we -- I tell everybody, we get a very high percentage of our orders in the month of shipment. So while 11%, I think, is outstanding, I want to be careful, and we don't have visibility very far out. So yes, when you speak to customers and you see all the stuff we're doing, I'm very excited and bullish. But 11% is really a breakneck number. So yes. And again, off a decent comp last year, so when you put the whole thing together, I think it really is a very excellent number.

No, very impressive. And then, so I noticed Larry mentioned before, there may have been a broker, I guess, involved with AAT. I know you had something similar with Robertson, so I know you said the update guidance takes into account the AAT. And so are there any, I guess, additional costs that are built into the (inaudible) there?

No, the representative was on the part of the seller. And no, we don't have any brokerage fees. I just mentioned that, that particular broker investment banker, who happens to be very good. We have purchased other companies from him. And he's a pretty straight guy, and we've had a good relationship with him. I just mentioned that in part of his sales pitch, what you would expect, he says, the sky's the limit going forward, and of course, Victor and I have kind of toned that down. But I said it sort of tongue-in-cheek because we do believe that, that Aero will be a growth company. But we don't want to overdo it and promise something and then fail to deliver. We'd rather err on the side of conservatism. And if it comes through, it comes through. We're optimistic that it will.

Your next question is from the line of Greg Konrad with Jefferies.

Just to stay with AeroAntenna for a bit and then also maybe if there's broader implications for the overall business. I mean, where are the opportunities with kind of the increasing connectivity for commercial aircraft and maybe also the ADS-B rollout?

I think there are opportunities on connectivity on commercial aircraft. ADS-B, I don't think it's going to be a big impact, if any, on Aero at this point. I wouldn't rule it out, but I do think there's opportunity on connectivity for sure.

And then just kind of housekeeping. In the quarter, amortization and depreciation, how much of a hit was that to margins within the FSG segment?

As I mentioned earlier to the margin for the quarter, amortization and depreciation on newly acquired assets, assets that we bought this fiscal year were about 0.5 of a 0.8 decrease.

Your next question comes from the line of Michael Ciarmoli with SunTrust.

Maybe, Carlos, just on the AAT deal and thinking about some of the recent deals you've made, can you give us a sense what the current revenue mix might look like on a pro forma, the total defense exposure, aerospace exposure? And even if you can parse out maybe some of that pure aftermarket. And I know, I guess, you've got a little bit of OEM there. Is that something you can help us with?

So I can. The AeroAntenna historically, probably 50% to 60% defense. Rest is pretty much commercial aero. And that, unfortunately, at this point of the juncture, Michael, is all I can divulge.

Okay. And then what about -- can you give us an update on the rest of the business, kind of taking into account Carbon by Design and I think Air Cost Control? Sort of what's the HEICO mix right now in terms of aero and commercial aero and defense?

Well, our commercial aero, roughly on a consolidated basis through the first 9 months, is about 54%. Our defense is about 1/4. It's down a few ticks as result of some of the push to the right of some of the projects, as mentioned earlier. And we picked up that in more commercial aero and really robust business across all of our other product lines. So that's kind of the mix. I mean, it shifted minutely, if you would.

Got it. Okay. That's helpful. And then just last one for me. Victor, ETG, I mean, great margins in the quarter. I think a multi-quarter high, largely on weaker growth, weaker sequential volumes. I mean, how should we think about the margins going forward and the sustainability there? I mean, was there anything unique in the quarter that drove those margins?

Yes. This is Victor. It's a good question. I think as we said, we're looking at 26% or so right now. I would say pretty much what we had in the release is operative, and that is we -- gross margins were strong. Expenses were held well in line. I think a good mix overall of the products. And that's going to bob around quarter-to-quarter. We -- the margins have improved a little bit over time, I think more than we'd even hoped for. And some of that's going to be acquisition mix sensitive. If we find an acquisition that's higher, as you know, than our average, then that would drive those up. And if we find acquisitions that are lower but still very healthy margin, that would drive it down. And of course, we're competitive markets and things like that, so were always sharpening our pencils at our customers, making sure we're giving them the best deal. It's not a price increase strategy. In fact, usually, the opposite. We're finding ways to be more efficient and to pass some of those savings along to our customers and share them. I think it's a value proposition across the board for us. And that's going to continue, I think, as well.

Your next question comes from the line of Eduardo Finkler with FK Capital Market.

Since the ETG group sales total revenue had been increasing in the last year, I was wondering if you'll see this trend to continue. And maybe based in your acquisition pipeline, are you finding more opportunities in 1 of the 2 segments? Or not really?

Could you maybe repeat the first part of the question? I think we missed the first sentence or 2. We didn't quite understand it.

Yes. Since ETG group's share of total revenue has been increasing in the last years, it's becoming bigger as percentage of total revenue. I was wondering if you see this trend to continue, and maybe based on your acquisition pipeline, you are finding more opportunities in 1 of the 2 segments.

No, it ebbs and flows. I mean, the ETG, we don't have a magic number of where we're trying to keep the ETG versus the Flight Support Group. We expect that, like we've seen in the past, there will be years we'll have a whole bunch of acquisitions in Flight Support, not ETG and vice versa. And so Flight Support, we've made 2 acquisitions this year and announced 1 in ETG. And I don't think there's anything to say that the ETG won't grow as a percent of revenue, but it's not certain. It all depends where the opportunities are. And I think you know that we view it as our jobs to be opportunistic and not become married to any doctor. And as we say, our playbook is, in many ways, do not have a playbook.

Yes. I think that's right, Victor. This is Carlos. From my perspective, the goal or the mission that we have as an executive management team is to allocate capital in the most efficient and beneficial way for our shareholders. And that is really what Victor means with the opportunistic investments that we make. And there's no playbook, to his point, as to where we put those dollars in any 1 point in time. We have a very robust pipeline of opportunities that we continue to go through. And it doesn't -- it's not -- we're agnostic as to whether we spend money in Flight Support or Electronic Technologies so long as it has very strong cash flows for our investors as a result of the deal.

Carlos, I agree with that, and I'd even add more that our -- all of the good companies we can [level], none of the poor companies we can buy. And that we don't have acquisition clock. So if the opportunity is there, we'll take advantage of them at the right prices with the right company. And if they're not there, we're not going (inaudible) acquisitions just to get it done or to keep some artificial percentage relationship. Does that help?

Yes.

Your final question comes from the line of Colin Ducharme with Sterling Capital.

I'm sorry, I got on the call a bit late. You may have already covered this. But I'm just curious, was the AeroAntenna a competitive auction process? Or was that just you negotiating with that company and the broker?

Ultimately, it was just us and the investment banker. They had reached out to some companies. But ultimately, the seller, the owner, founder, seller manager and we decided that we wanted to do, together, a deal together. I think he could have done other things, but he chose us, which is typical of the acquisitions. And it wasn't, I would say, on economics solely. It was more on other factors, which brought us together.

Got you. Okay. And then just a quick follow-up in terms of the M&A function. A year or more ago, you had the Robertson Fuel Systems deal. If memory serves, that was -- the seller there was a financial sponsor. With the AAT deal, a bit of a different situation with the founder-owner looking for an exit -- or I'm sorry, not an exit, a liquidity opportunity. I apologize. As the law of large numbers dictates that HEICO needs bigger deals over time to "move the needle," I'm just curious if you could characterize that robust pipeline that Carlos touched on. Is the mix in terms of opportunities skewing towards these larger deals over time? Because we might -- may have looked at Robertson as kind of a one-off. But here, with the AAT deal, you've done 1 that's even larger.

I think -- this is Larry. Again, we're an opportunistic buyer. We will by companies that we fold in. We'll buy smaller ones. We'll reach for larger ones. It all depends upon the opportunity. As we get larger, that's correct, it takes a larger company to move the needle. But we're looking at -- we want good companies. There are lot of large companies that are not so good. We've been offered very big companies that we've considered, and they just made no sense, either because the price was too high or the margins were too low. It didn't fit our model. So I mean, we have the capability of buying significantly larger companies. However, you can imagine, internally, we have our own financial models, and we set our financing, our credit line and our borrowing to match what we

(technical difficulty)

(technical difficulty)

Hello?

Hello?

Hello? Yes, I apologize. I got cut off there.

Okay. So I don't know what the last thing you heard, but I think there are plenty of opportunities within the size, range that we buy. And remember, we're not looking for top line growth. We want bottom line growth. That's what we focus on, bottom line growth, cash flow margin. And we think there are plenty of opportunities over the next 3 to 5 years. I'm not trying to project out past 3 to 5 years. We take 3 to 5 years, and then we move it like a 5-year plan. So there are plenty of opportunities.

Got you. Okay. And I know the call is getting long, so just a final wrap-up question. Also on the consolidation theme, but just curious in terms of how it's affecting the landscape around you. So Eric talks a lot about OEM pressure on airlines. But I'm curious, in the newer landscape that exists today, at least here in North America where we have a much more consolidated airline landscape, does the balance of power shift at all with that power play between the OEMs and the airlines, and there's a trend there with the lessors gaining share over time as well? And then probing that kind of theme from a different angle, we've got some consolidation elsewhere, for example, a rumored deal between Rockwell and Honeywell with avionics and other areas. I'm curious, if these landscapes continue to consolidate, does that change -- how does that change the market dynamic at all -- if at all, for HEICO? And kind of what's your view on how that develops over time and the effects on your business?

Thanks for your question. As I think we mentioned earlier in the call that consolidation generally has been favorable to HEICO for the reasons that you pointed out. And basically, as the airlines have more critical mass and are bigger buyers, they are able to exercise greater control. And I think some of the power shifts more over to that area for them. So I think that probably is a good trend for HEICO. As far as the OEMs consolidating, that really hasn't had much of an impact on HEICO other than sometimes when there is consolidation and basically high prices are paid, those prices need to be -- high prices are paid for assets, those prices -- the costs need to be made up in terms of the increased profitability. And we all know that when somebody has total control over the spare parts pricing, that normally doesn't help reduce their customers' costs. So I think, in general, both of those trends are positive to HEICO, but it's sort of hard to figure out exactly the specific benefits in each case.

There are no further questions at this time. I would now like to turn the floor back over to management for any further or closing remarks.

Well, this has been a long call and a lot of very good questions have come up. As you know, we remain available. If you have further questions, give us a call. If not, we look forward to speaking to you probably sometime in mid-December, where we'll have the full fiscal year '17 plus the fourth quarter results. So have a very, very good Labor Day, a good fall, and we look forward to speaking to you in December. That's all we have for now.

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